<PAGE>   1


===============================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


   [X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

  [ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                          COMMISSION FILE NO. 0-19279

                        EVERFLOW EASTERN PARTNERS, L.P.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           DELAWARE                                   34-1659910
(STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                    IDENTIFICATION NO.)

    585 WEST MAIN STREET
       P.O. BOX 629
      CANFIELD, OHIO                                   44406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)             (ZIP CODE)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330)533-2692

Securities registered pursuant to Section 12(b) of the Act.

                                                  NAME OF EACH EXCHANGE
       TITLE OF EACH CLASS                         ON WHICH REGISTERED

                                     None

Securities registered pursuant to Section 12(g) of the Act:

                      UNITS OF LIMITED PARTNERSHIP INTEREST

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X    No
                                             ---     ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  X
                             ---

         There are 4,819,641 Units of limited partnership interest held by
non-affiliates of the Registrant as of March 20, 1997. The Units generally do
not have any voting rights, but, in certain circumstances, the Units are
entitled to one vote per Unit.

        Except as otherwise indicated, the information contained in this Report
is as of December 31, 1997.

<PAGE>   2

                                     PART I
                                     ------
                                     

ITEM 1.         BUSINESS
------------------------

INTRODUCTION

                  Everflow Eastern Partners, L.P. (the "Company"), a Delaware
limited partnership, engages in the business of oil and gas exploration and
development. The Company was formed for the purpose of consolidating the
business and oil and gas properties of Everflow Eastern, Inc., an Ohio
corporation ("EEI"), and the oil and gas properties owned by certain limited
partnerships and working interest programs managed or operated by EEI (the
"Programs"). Everflow Management Company, an Ohio general partnership, is the
general partner of the Company.

                  EXCHANGE OFFER. The Company made an offer (the "Exchange
Offer") to acquire the common shares of EEI (the "EEI Shares") and the interests
of investors in the Programs (collectively the "Interests") in exchange for
units of limited partnership interest (the "Units"). The Exchange Offer was made
pursuant to a Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on December 19, 1990 (the "Registration
Statement") and the Prospectus dated December 19, 1990 as filed with the
Commission pursuant to Rule 424(b).

                  The Exchange Offer terminated on February 15, 1991 and holders
of Interests with an aggregate value (as determined by the Company for purposes
of the Exchange Offer) of $66,996,249 accepted the Exchange Offer and tendered
their Interests. Effective on such date, the Company acquired such Interests,
which included partnership interests and working interests in the Programs, and
all of the outstanding EEI Shares. Of the Interests tendered in the Exchange
Offer, $28,565,244 was represented by the EEI Shares and $38,431,005 by the
remaining Interests.

                  The parties who accepted the Exchange Offer and tendered their
Interests received an aggregate of 6,632,464 Units. Everflow Management Company,
as General Partner of the Company, contributed Interests with an aggregate
Exchange Value of $670,980 in exchange for a 1% interest in the Company.

                  THE COMPANY. The Company was organized in September, 1990. The
principal executive offices of the Company, Everflow Management Company and EEI
are located at 585 West Main Street, Canfield, Ohio 44406 (telephone number
(330)533-2692).

GENERAL

                  This Annual Report on Form 10-K contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, the competition within the oil and gas industry, the price of oil

                                      -1-

<PAGE>   3


and gas in the Appalachian Basin area, the number of Units tendered pursuant to
the Repurchase Right and the ability to locate productive oil and gas prospects
for development by the Company.

DESCRIPTION OF THE BUSINESS

                  GENERAL. Following the consummation of the Exchange Offer, the
Company has participated on an on-going basis in the acquisition and development
of undeveloped oil and gas properties and has pursued the acquisition of
producing oil and gas properties.

                  SUBSIDIARIES. The Company has three subsidiaries. EEI was
organized as an Ohio corporation in February, 1979 and, since the consummation
of the Exchange Offer, has been a wholly-owned subsidiary of the Company. EEI is
engaged in the business of drilling, developing and operating oil and gas
properties and acting as the general partner or sponsor of the Programs. Prior
to the consummation of the Exchange Offer, EEI had acted as general contractor
in the drilling and completion of more than 550 wells and had served as operator
of more than 650 producing wells, the substantial majority of which are located
in the State of Ohio.

                  Everflow Nominee, Inc. ("Everflow Nominee") was organized as
an Ohio corporation in May 1987 and is a wholly-owned subsidiary of EEI and is
indirectly controlled by the Company. Everflow Nominee's sole business is to
serve as a nominee and agent to hold legal or record title to working interests
in drillsites developed by the Programs since 1987. Everflow Nominee, as nominee
of and agent for various Programs, holds the legal or record title to the
working interests in drillsites and wells beneficially owned by certain of the
Programs.

                  A-1 Storage of Canfield, Ltd. ("A-1 Storage") was organized as
an Ohio limited liability company in late 1995 and is 99% owned by the Company
and 1% owned by EEI. A-1 Storage's business includes leasing of office space to
the Company as well as rental of storage units to non-affiliated parties.

                  CURRENT OPERATIONS. The properties acquired in the Exchange
Offer consist in large part of fractional undivided working interests in
properties containing Proved Reserves of oil and gas located in the Appalachian
Basin region of Ohio and Pennsylvania. Approximately 84% of the estimated future
gross cash flow from the oil and gas properties owned by the Company are
attributable to natural gas reserves. The substantial majority of such
properties are located in Ohio and consist primarily of proved producing
properties with established production histories.

                  The Company's operations since February 1991, following
consummation of the Exchange Offer, primarily involve the production and sale of
oil and gas from the properties acquired pursuant to the Exchange Offer and the
drilling and development of an additional 200 (net) wells. The Company serves as
the operator of approximately 68% of the gross wells and 77% of the net wells
which comprise the Company's properties.


                                      -2-

<PAGE>   4

                  The Company expects to hold its producing properties acquired
pursuant to the Exchange Offer until the oil and gas reserves underlying such
properties are substantially depleted. However, the Company may from time to
time sell any of its producing or other properties or leasehold interests if the
Company believes that such sale would be in its best interest.

                  BUSINESS PLAN. The Company intends to conduct its business to
enable it to maintain and possibly expand its reserve base. In order to further
this plan, the Company primarily intends to acquire and subsequently drill and
develop non-producing oil and gas properties and possibly acquire producing oil
and gas properties. Based on the current costs of drilling and development
activities, the current prices of oil and gas, and EEI's historical experience
with regard to finding oil and gas in commercially productive quantities as well
as estimates for such costs, prices and success rates in the immediate future,
the Company estimates it will need to acquire and drill approximately 20 to 30
(net) wells each year to maintain and possibly expand its reserve base. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."

                  ACQUISITION OF PROSPECTS. The Company, through its
wholly-owned subsidiary EEI, maintains a leasehold inventory from which Everflow
Management Company will select oil and gas prospects for development by the
Company. EEI makes additions to such leasehold inventory on an ongoing basis.
The Company may also acquire leases from third parties. Historically, EEI
generated approximately 90% of the prospects which were drilled by the Programs.
The Company expects EEI's ability to generate drilling prospects internally to
continue in order to further the Company's activities. EEI's current leasehold
inventory consists of approximately 121 prospects in various stages of maturity
representing approximately 2,200 net acres under lease.

                  In choosing oil and gas prospects for the Company, Everflow
Management Company does not attempt to manage the risks of drilling through a
policy of selecting diverse prospects in various geographic areas or with the
potential of oil and gas production from different geological formations.
Rather, substantially all prospects are expected to be located in the
Appalachian Basin of Ohio (and, to a lesser extent, Pennsylvania) and to be
drilled primarily to the Clinton/Medina Sands geological formation or closely
related oil and gas formations in such area.

                  ACQUISITION OF PRODUCING PROPERTIES. As a potential means of
increasing its reserve base, the Company expects to evaluate opportunities which
it may be presented with to acquire oil and gas producing properties from third
parties in addition to its ongoing leasehold acquisition and development
activities. To date, the Company has acquired only a very limited amount of
producing oil and gas properties.

                  The Company will continue to evaluate properties for
acquisition. Such properties may include, in addition to working interests,
royalty interests, net profit interests and production payments, other forms of
direct or indirect ownership interests in oil and gas production, and properties
associated with the production of oil and gas. The Company also may 


                                       -3-
<PAGE>   5

acquire general or limited partner interests in general or limited partnerships
and interests in joint ventures, corporations or other entities that have, or
are formed to acquire, explore for or develop, oil and gas or conduct other
activities associated with the ownership of oil and gas production.

                  FUNDING FOR ACTIVITIES. The Company finances its current
operations and proposed undeveloped leasehold acquisition activities through
cash generated from operations and the proceeds of borrowings. Prior to the
Exchange Offer, EEI relied upon the formation of investor drilling programs to
fund a portion of its operations; but to date, the Company has elected not to
pursue such activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Results of Operations."

                  The Company is permitted to incur indebtedness for any
partnership purpose. It is currently anticipated that any such indebtedness will
consist primarily of borrowings from commercial banks. The Company and EEI has a
revolving credit facility with Bank One, National Association, pursuant to which
it had borrowed up to $4,100,000 in 1997 with a principal indebtedness of
$2,400,000 outstanding as of March 20, 1998. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."

                  Although the Partnership Agreement does not contain any
specific restrictions on borrowings, the Company has no specific plans to borrow
to acquire any producing oil and gas properties. The Company expects that
borrowings may be made to acquire undeveloped acreage for future drilling and
development and to fund the Company's costs of drilling and completing wells. In
addition, the Company could borrow funds to enable it to repurchase any Units
tendered in connection with the Repurchase Right. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."

                  The Company has a substantial amount of oil and gas reserves
which have not been pledged as collateral for its existing loans. The Company
generally would not expect to borrow funds, from whatever source, in excess of
40% of its total Proved Reserves (as determined using the Company's Standardized
Measure of Discounted Future Net Cash Flows), although there can be no assurance
that circumstances would not lead to the necessity of borrowings in excess of
this amount. Based upon its current business plan, management has no present
intention to have the Company borrow in excess of this amount. The Company has
estimated Proved and Proved Developed Reserves, determined as of December 31,
1997, which aggregate $46,094,000 (Standardized Measure of Discounted Future Net
Cash Flows) with $4,100,000 of bank debt under the revolving credit facility (as
of such date).

MARKETING

                  The ability of the Company to market oil and gas found in and
produced on its properties will depend on many factors beyond its control, the
effect of which cannot be accurately anticipated or predicted. These factors
include, among others, the amount of domestic 


                                       -4-
<PAGE>   6


oil and gas production and foreign imports available from other sources, the
capacity and proximity of pipelines, governmental regulations, and general
market demand.

                  OIL. Any oil produced from the properties can be sold at the
prevailing field price to one or more of a number of unaffiliated purchasers in
the area. Generally, purchase contracts for the sale of oil are cancelable on 30
days' notice. The price paid by these purchasers is generally an established or
"posted" price which is offered to all producers. All posted prices in the areas
where the Company's properties are located are generally somewhat lower than the
spot market prices, although there have been substantial fluctuations in crude
oil prices in recent years.

                  The price of crude oil has decreased since the end of the
conflict in the Persian Gulf in March 1991, dropping from a high of $28.50 per
barrel in January 1991 to $13.50 in December 1993 and $14.25 in December 1997.
As of March 20, 1998 the posted field price in the Appalachian Basin area, the
Company's principal area of operation, was $11.00 per barrel of oil. There can
be no assurance that prices will not be subject to continual fluctuations.
Future oil prices are difficult to predict because of the impact of worldwide
economic trends, supply and demand variables, and such non-economic factors as
the political impact on pricing policies by the Organization of Petroleum
Exporting Countries ("OPEC") and the possibility of supply interruptions. To the
extent prices which the Company receives for its crude oil production decline or
remain at current levels, the Company's revenues from oil production will be
reduced accordingly.

                  Beginning in January 1993, the Company began selling the
majority of its crude oil production to Quaker State under the terms of the
Quaker State Full Load Crude Oil Purchase Agreement. This agreement provided the
Company with a $0.40 per barrel premium price for 80 net barrel minimum
quantities and an $0.80 per barrel premium price for 160 net barrel minimum
quantities. The term of the agreement was three years and included substantially
all of the Company's Appalachian Basin oil production. The nature of the
business has now made the provisions of this agreement customary for crude oil
production purchased in the Appalachian Basin. As a result, the Company
continues to receive pricing consistent with the terms of the agreement without
a formal agreement in place.

                  NATURAL GAS. The deliverability and price of natural gas is
subject to various factors affecting the supply and demand of natural gas as
well as the effect of federal regulations. During the past several years, there
has been a surplus of natural gas available for delivery to pipelines and other
purchasers. This oversupply, reduced demand due to economic conditions and
several mild winters have resulted in volatility in prices for natural gas
throughout the U.S., including the Appalachian Basin. From time to time,
especially in summer months, seasonal restrictions on natural gas production
have occurred as a result of distribution system restrictions. Certain of the
wells acquired by the Company in the Exchange Offer have been subject to these
limited, seasonal shut-ins and restrictions.

                  Prior to the execution of the East Ohio Contracts (discussed
below), EEI's historical practice had been to generally sell natural gas
pursuant to various purchase contracts 


                                       -5-
<PAGE>   7


with a number of natural gas brokerage firms, pipeline companies or end-user
customers. The provisions of these contracts, both as to term and price, varied
significantly. The term of these contracts varied from short term,
month-to-month arrangements up to the life of a particular well. Most of these
natural gas purchase contracts were for a term of one year, expiring each
October, and enabled the purchaser to renew the contracts for additional
one-year terms during the fourth quarter of the year. Pricing provisions varied
materially among the contracts.

                  The Company has various Intermediate Term Adjustable Price Gas
Purchase Agreements (the "East Ohio Contracts") with The East Ohio Gas Company
("East Ohio"). Pursuant to the East Ohio Contracts and subject to certain
restrictions and adjustments, including termination clauses, East Ohio is
obligated to purchase, and the Company is obligated to sell, all natural gas
production from a specified list of wells (the "Contract Wells"). A summary of
the Company's principal East Ohio Contracts at December 31, 1997 follows:
<TABLE>
<CAPTION>

  Contract            Period         Number            Required            Shut-In             Limitation
    Date              Covered       of Wells           Purchases          Provisions           Provisions
  --------            -------       --------           ---------          ----------           ----------

  <S>              <C>                <C>          <C>                   <C>                 <C>
   9/3/91           11/91-10/01        438          275 days/year        Maximum of           May-Oct. - 50%
                                                                         60 days (Nov.-       of production
                                                                         April)               from prior 6
                                                                                              month period

   3/10/94           4/94-3/00          49          275 days/year        Maximum of           May-Oct. - 50%
                                                                         60 days (Nov.-       of production
                                                                         April)               from prior 6
                                                                                              month period

   8/10/94          11/94-10/00         28          Nov.-March           April-Oct.           Shut-in provisions


<CAPTION>



                                                       NET PRICE PER MCF
            ------------------------------------------------------------------------------------------------------
                 Initially                                       Adjusted Prices
  Contract  ---------------------  -------------------------------------------------------------------------------
   Date     Nov.-April    May-Oct.    11/95-4/96   5/96-10/96      11/96-4/97 5/97-10/97   11/97-4/98   5/98-10/98
   ----     ----------    -------     ----------   ----------      ---------- ----------   ----------   ----------
   <S>         <C>        <C>           <C>          <C>           <C>          <C>          <C>          <C>  
   9/3/91       $2.85      $2.22         $2.84        $2.21         $3.31        $2.68        $3.90        $3.27
  3/10/94       $2.98      $2.28         $2.48        $1.78         $2.95        $2.25        $3.54        $2.84
  8/10/94       $3.08        N/A         $2.82          N/A         $3.55          N/A        $4.14          N/A

</TABLE>

                  As detailed above, the price paid for natural gas purchased
under the East Ohio Contracts varies with the production period. Pricing under
the East Ohio Contracts is adjusted annually (after the first adjustment), up or
down, by an amount equal to 80% of the increase or decrease in East Ohio's
average Gas Cost Recovery ("GCR") rates. Additionally, the August 10, 1994
contract provides for a price cap equal to the quarterly GCR, which amounted to
$4.20, 

                                      -6-
<PAGE>   8

$4.05 and $3.00 in November 1997, 1996 and 1995, respectively. The net
price per MCF includes $.20 per MCF for transportation less a $.02 per MCF
metering charge.

                  In addition to the East Ohio Contracts described above, the
Company has various short-term contracts (covering production from 59 gross
wells at December 31, 1997) which have a primary term of one year. Forty of the
wells are covered by fixed price contracts that provide for the sale of the
Company's gas at $2.70 to $2.95 per MCF. The remaining nineteen wells are
covered by a variable rate contract that provides for the sale of the Company's
gas based on a monthly NYMEX settlement, with no floor price provisions, plus
$.52 per MCF (including transportation allowances). There are no significant
production restrictions under the Company's short-term contracts as they relate
to the Company's existing wells. Future wells can be added to certain of the
contracts subject to gross production restrictions under the contracts. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Inflation and Changes in Prices."

                  For the year ended December 31, 1997, with the exception of
The East Ohio Gas Company, which purchased approximately 80% of the Company's
natural gas production in 1997, no one natural gas purchaser has accounted for
more than 10% of the Company's gas sales. The Company expects that East Ohio
will be the only material natural gas customer for 1998.

SEASONALITY

                  The East Ohio Contract (i) provides that certain wells can be
shut-in for a period of time and (ii) limits the obligation of East Ohio to
purchase natural gas during the May to October production period. These
production restrictions, and the nature of the Company's business, result in
seasonal fluctuations in the Company's revenue, with the Company receiving more
income in the first and fourth quarters of its fiscal year.

TITLE TO PROPERTIES

                  As is customary in the oil and gas industry, the Company
performs a limited investigation as to ownership of leasehold acreage at the
time of acquisition and conducts a title examination and necessary curative work
prior to the commencement of drilling operations on a tract. Title examinations
have been performed for substantially all of the producing oil and gas
properties owned by the Company with regard to (i) substantial tracts of land
forming a portion of such oil and gas properties and (ii) the wellhead location
of such properties. The Company believes that title to its properties is
acceptable although such properties may be subject to royalty, overriding
royalty, carried and other similar interests in contractual arrangements
customary in the oil and gas industry. Also, such properties may be subject to
liens incident to operating agreements and liens for current taxes not yet due,
as well as other comparatively minor encumbrances.


                                      -7-

<PAGE>   9


COMPETITION

                  The oil and gas industry is highly competitive in all its
phases. The Company will encounter strong competition from major and independent
oil companies in acquiring economically desirable prospects as well as in
marketing production therefrom and obtaining external financing. Major oil and
gas companies, independent concerns, drilling and production purchase programs
and individual producers and operators are active bidders for desirable oil and
gas properties, as well as the equipment and labor required to operate those
properties. Many of the Company's competitors have financial resources,
personnel and facilities substantially greater than those of the Company.

                  The availability of a ready market for the oil and gas
production of the Company depends in part on the cost and availability of
alternative fuels, the level of consumer demand, the extent of other domestic
production of oil and gas, the extent of importation of foreign oil and gas, the
cost of and proximity to pipelines and other transportation facilities,
regulations by state and federal authorities and the cost of complying with
applicable environmental regulations. The volatility of prices for oil and gas
and the continued oversupply of domestic natural gas has, at times, resulted in
a curtailment in exploration for and development of oil and gas properties.

                  There is also extensive competition in the market for gas
produced by the Company. Increases in worldwide energy production capability and
decreases in energy consumption as a result of conservation efforts have brought
about substantial surpluses in energy supplies in recent years. This, in turn,
has resulted in substantial competition for markets historically served by
domestic natural gas resources both with alternate sources of energy, such as
residual fuel oil, and among domestic gas suppliers. As a result, at times there
has been volatility in oil and gas prices, widespread curtailment of gas
production and delays in producing and marketing gas after it is discovered.
Changes in government regulations relating to the production, transportation and
marketing of natural gas have also resulted in significant changes in the
historical marketing patterns of the industry. Generally, these changes have
resulted in the abandonment by many pipelines of long-term contracts for the
purchase of natural gas, the development by gas producers of their own marketing
programs to take advantage of new regulations requiring pipelines to transport
gas for regulated fees, and an increasing tendency to rely on short-term sales
contracts priced at spot market prices. See "Marketing" above.

                  In light of these developments, many producers have accepted
prices that are lower than those previously prevailing to sell their production.
As a consequence, gas prices, which were once effectively determined by
government regulations, are now influenced largely by the effects of
competition. Competitors in this market include other producers, gas pipelines
and their affiliated marketing companies, independent marketers, and providers
of alternate energy supplies.

REGULATION OF OIL AND GAS INDUSTRY

                  The exploration, production and sale of oil and natural gas
are subject to numerous state and federal laws and regulations. Such laws and
regulations govern a wide 

                                      -8-

<PAGE>   10

variety of matters, including the drilling and spacing of wells, allowable rates
of production, marketing, pricing and protection of the environment. Such
regulations may restrict the rate at which the Company's wells produce oil and
natural gas below the rate at which such wells could produce in the absence of
such regulations. In addition, legislation and regulations concerning the oil
and gas industry are constantly being reviewed and proposed. The States of Ohio
and Pennsylvania, the states in which the Company owns properties and operates,
have statutes and regulations governing a number of the matters enumerated
above. Compliance with the laws and regulations affecting the oil and gas
industry generally increases the Company's costs of doing business and
consequently affects its profitability. Inasmuch as such laws and regulations
are frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such regulations.

                  The interstate transportation and sale for resale of natural
gas is regulated by the Federal Energy Regulatory Commission (the "FERC") under
the Natural Gas Act of 1938 ("NGA"). The wellhead price of natural gas is also
regulated by FERC under the authority of the Natural Gas Policy Act of 1978
("NGPA"). Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act") was enacted on July 26, 1989. The Decontrol Act provided for
the phasing out of price regulation under the NGPA commencing on the date of
enactment and completely eliminated all such gas price regulation on January 1,
1993. In addition, FERC recently has adopted and proposed several rules or
orders concerning transportation and marketing of natural gas. The impact of
these rules and other regulatory developments on the Company cannot be
predicted. It is expected that the Company will sell natural gas produced by its
oil and gas properties to a number of purchasers, including various industrial
customers, pipeline companies and local public utilities, although the majority
will be sold to The East Ohio Gas Company as discussed earlier.

                  As a result of the NGPA and the Decontrol Act, the Company's
gas production is no longer subject to price regulation. Gas which has been
removed from price regulation is subject only to that price contractually agreed
upon between the producer and purchaser. Under current market conditions,
deregulated gas prices under new contracts tend to be substantially lower than
most regulated price ceilings originally prescribed by the NGPA. FERC recently
has proposed and enacted several rules or orders concerning transportation and
marketing of natural gas. In 1992, the FERC finalized Order 636, a rule
pertaining to the restructuring of interstate pipeline services. This rule
requires interstate pipelines to unbundle transportation and sales services by
separately pricing the various components of their services, such as supply,
gathering, transportation and sales. These pipeline companies are required to
provide customers only the specific service desired without regard to the source
for the purchase of the gas. Although the Partnership is not an interstate
pipeline, it is likely that this regulation may indirectly impact the
Partnership by increasing competition in the marketing of natural gas, possibly
resulting in an erosion of the premium price historically available for
Appalachian natural gas. The impact of these rules and other regulatory
developments on the Company cannot be predicted.

                  Regulation of the production, transportation and sale of oil
and gas by federal and state agencies has a significant effect on the Company
and its operating results. Certain states, 

                                      -9-
<PAGE>   11


including Ohio and Pennsylvania, have established rules and regulations
requiring permits for drilling operations, drilling bonds and reports concerning
the spacing of wells.

ENVIRONMENTAL REGULATION

                  The activities of the Company are subject to various federal,
state and local laws and regulations designed to protect the environment. The
Company does not conduct activities offshore. Operations of the Company on
onshore oil properties may generally be liable for clean-up costs to the federal
government under the Federal Clean Water Act for up to $50,000,000 for each
incident of oil or hazardous pollution substance and for up to $50,000,000 plus
response costs under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (Superfund) for hazardous substance contamination.
Liability is unlimited in cases of willful negligence or misconduct, and there
is no limit on liability for environmental clean-up costs or damages with
respect to claims by the state or private persons or entities. In addition, the
Company is required by the Environmental Protection Agency to prepare and
implement spill prevention control and countermeasure plans relating to the
possible discharge of oil into navigable waters; and the Environmental
Protection Agency will further require permits to authorize the discharge of
pollutants into navigable waters. State and local permits or approvals may also
be needed with respect to waste-water discharges and air pollutant emissions.
Violations of environment-related lease conditions or environmental permits can
result in substantial civil and criminal penalties as well as potential court
injunctions curtailing operations. Such enforcement liabilities can result from
prosecution by public or private entities.

                  Various state and governmental agencies are considering, and
some have adopted, other laws and regulations regarding environmental protection
which could adversely affect the proposed business activities of the Company.
The Company cannot predict what effect, if any, current and future regulations
may have on the operations of the Company.

                  In addition, from time to time, prices for either oil or
natural gas have been regulated by the federal government, and such price
regulation could be reimposed at any time in the future.

OPERATING HAZARDS AND UNINSURED RISKS

                  The Company's oil and gas operations are subject to all
operating hazards and risks normally incident to drilling for and producing oil
and gas, such as encountering unusual formations and pressures, blow-outs,
environmental pollution and personal injury. The Company maintains such
insurance coverage as it believes to be appropriate taking into account the size
of the Company and its operations. Losses can occur from an uninsurable risk or
in amounts in excess of existing insurance coverage. The occurrence of an event
which is not insured or not fully insured could have an adverse impact on the
Company's revenues and earnings.

                  In certain instances, the Company may continue to engage in
exploration and development operations through drilling programs formed with
non-industry investors. In 

                                      -10-
<PAGE>   12


addition, the Company also will conduct a significant portion of its operations
with other parties in connection with the drilling operations conducted on
properties in which it has an interest. In these arrangements, all joint
interest parties, including the Company, may be fully liable for their
proportionate share of all costs of such operations. Further, if any joint
interest party defaults on its obligations to pay its share of costs, the other
joint interest parties may be required to fund the deficiency until, if ever, it
can be collected from the defaulting party. As a result of the foregoing or
similar oilfield circumstances, the Company could become liable for amounts
significantly in excess of amounts originally anticipated to be expended in
connection with such operations. In addition, financial difficulty for an
operator of oil and gas properties could result in the Company's and other joint
interest owners' interests in properties and the wells and equipment located
thereon becoming subject to liens and claims of creditors, notwithstanding the
fact that non-defaulting joint interest owners and the Company may have
previously paid to the operator the amounts necessary to pay their share of such
costs and expenses.

CONFLICTS OF INTEREST

                  The Partnership Agreement grants Everflow Management Company
broad discretionary authority to make decisions on matters such as the Company's
acquisition of or participation in a drilling prospect or a producing property.
To limit Everflow Management Company's management discretion might prevent
Everflow Management Company from managing the Company properly. However, because
the business activities of the affiliates of Everflow Management Company on the
one hand and the Company on the other hand are the same, potential conflicts of
interest are likely to exist, and it is not possible to completely mitigate such
conflicts.

                  The Partnership Agreement contains certain restrictions
designed to mitigate, to the extent practicable, these conflicts of interest.
The agreement restricts, among other things, (i) the cost at which the general
partner or its affiliates may acquire properties from or sell properties to the
Company; (ii) loans between the general partner, its affiliates and the Company,
and interest and other charges incurred in connection therewith; and (iii) the
use and handling of the Company's funds by the general partner.

EMPLOYEES

                  As of March 20, 1998, the Company (either directly or
indirectly through EEI) had 27 full-time employees. These employees primarily
are engaged in the following areas of business operations: six in land and lease
acquisition, seven in field operations, seven in accounting, and seven in
administration.

                                      -11-

<PAGE>   13


ITEM 2.         PROPERTIES.
---------------------------

                  Set forth below is certain information regarding the oil and
gas properties of the Company.

                  In the following discussion, "gross" refers to the total acres
or wells in which the Company has a working interest and "net" refers to gross
acres or wells multiplied by the Company's percentage of working interests
therein. Because royalty interests held by the Company will not affect the
Company's working interests in its properties, neither gross nor net acres or
wells reflects such royalty interests.

                  PROVED RESERVES.(1) The following table reflects the estimates
of the Company's Proved Reserves which are based on the Company's report as of
December 31, 1997.
<TABLE>
<CAPTION>

                                                               Oil (BBLS)               Gas (MCF)
                                                               ----------              ----------
                  <S>                                          <C>                    <C>       
                  Proved Developed                              822,000                40,657,000
                  Proved Undeveloped                                 -                         -
                                                                 ------                       --
                  Total                                         822,000                40,657,000
                                                               =========               ==========
<FN>
                  
                  ---------------------------
                  (1)    The Company has not determined proved reserves
                         associated with its proved undeveloped acreage. A
                         reconciliation of the Company's proved reserves is
                         included in the Notes to the Financial Statements (page
                         F-21.)
</TABLE>


                  STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS.(1)
The following table summarizes as of December 31, 1997, the oil and gas reserves
attributable to the oil and gas properties owned by the Company. The
determination of the standardized measure of discounted future net cash flows as
set forth herein is based on criteria promulgated by the SEC, using calculations
based solely on Proved Reserves, current unescalated cost and price factors, and
discounted to present value at 10%.
<TABLE>
<CAPTION>

                                                                                       (Thousands)
                                                                                        ---------

                 <S>                                                               <C>          
                  Future cash inflows from sales of oil and gas                     $     124,466
                  Future production and development costs                                  48,085
                  Future income tax expense                                                 1,885
                                                                                        ---------

                  Future net cash flows                                                    74,496
                  Effect of discounting future net cash flows
                      at 10% per annum                                                     28,402
                                                                                       ----------
                  Standardized measure of discounted future
                      net cash flows                                                $      46,094
                                                                                       ==========
<FN>
   
               -----------------------
                  (1)      See the Notes to the Financial Statements for
                           additional information (pages F-19 to F-23).
</TABLE>


                                      -12-
<PAGE>   14


                  PRODUCTION. The following table summarizes the net oil and gas
production, average sales prices and average production (lifting) costs per
equivalent unit of production for the periods indicated.
<TABLE>
<CAPTION>

                                                               Average
                            Production                       Sales Price              
                    ---------------------------         ----------------------        Average Lifting Cost
                    Oil (BBLS)        Gas (MCF)         Per BBL        Per MCF        Per Equivalent MCF(1)
                    ----------        ---------         -------        -------        ---------------------

    <S>              <C>               <C>             <C>            <C>                <C>  
     1997             126,000           4,322,000       $ 17.10        $ 3.07             $ .48
     1996             112,000           4,264,000         19.88          2.78               .44
     1995             107,000           4,259,000         16.68          2.86               .41

<FN>
     ----------------------
     (1) Oil production is converted to MCF equivalents at the rate of 6 MCF per
BBL (barrel).
</TABLE>


                  PRODUCTIVE WELLS. The following table sets forth the gross and
net oil and gas wells of the Company as of December 31, 1997.

<TABLE>
<CAPTION>


                               Gross Wells                                  Net Wells
                    ----------------------------------------------------------------------------
                            (1)        (1)                              (1)              (1)
                       Oil         Gas        Total               Oil          Gas        Total
                    ----------------------------------------------------------------------------
                      <S>        <C>        <C>                  <C>          <C>         <C>      
                       81         1,028       1,109               46           646         692
<FN>
     
                    ------------------------ 
                    (1)    Oil wells are those wells which generate the majority
                           of their revenues from oil production; gas wells are
                           those wells which generate the majority of their
                           revenues from gas production.
</TABLE>


                  ACREAGE. The Company had 46,629 gross developed acres and
32,013 net developed acres as of December 31, 1997. Developed acreage is that
acreage assignable to productive wells. The Company had approximately 2,200
gross and net undeveloped acres as of December 31, 1997.


                                      -13-
<PAGE>   15


                  DRILLING ACTIVITY. The following table sets forth the results
of drilling activities on properties owned by the Company. Such information and
the results of prior drilling activities should not be considered as necessarily
indicative of future performance.
<TABLE>
<CAPTION>

                                                           Development Wells(1)
                                         -------------------------------------------------------------
                                                 Productive                             Dry
                                         ---------------------------         -------------------------
                                           Gross              Net              Gross             Net
                                         ---------          --------         ---------         -------

                    <S>                     <C>            <C>                 <C>               <C>                     
                    1997                     35             19.80                -                -
                    1996                     40             23.39                1               .23
                    1995                     49             30.19                -                -
<FN>
                    -------------------------     
                    (1)    All wells are located in the United States. All wells
                           are development wells; no exploratory wells were
                           drilled.
</TABLE>


                  PRESENT ACTIVITIES. The Company has drilled 6 gross and 3.2
net development wells since December 31, 1997. As of March 20, 1998, the Company
had one gross and 0.9 net wells in the process of being drilled.

                  DELIVERY COMMITMENTS. The Company entered into various East
Ohio contracts with East Ohio which, subject to certain restrictions and
adjustments, obligates East Ohio to purchase and the Company to sell all natural
gas production from certain contract wells. The contract wells comprise more
than 80% of the Company's net gas production.

ITEM 3.         LEGAL PROCEEDINGS
---------------------------------

                  There are no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------------

                  During the fourth quarter of the fiscal year ended December
31, 1997, there were no matters submitted to a vote of security holders through
the solicitation of proxies or otherwise.

                                      -14-


<PAGE>   16


                                     PART II
                                     -------


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------------------
MATTERS
-------

MARKET

                  There is currently no established public trading market for
the Company's Units of Limited Partnership. At the present time, the Company
does not intend to list any of the Units for trading on any exchange or
otherwise take any action to establish any market for the Units. As of March 20,
1998, there were 6,207,651 Units of limited partnership interest held by 1,652
holders of record.

DISTRIBUTION HISTORY.

                  The Company commenced operations with the consummation of the
Exchange Offer in February 1991. Management's stated intention was to make
quarterly cash distributions equal to $0.125 per Unit (or $0.50 per Unit on an
annualized basis) for the first eight quarters following the closing date of the
Exchange Offer. The Company has paid a quarterly distribution every quarter
since July 1991. Based upon the current number of Units outstanding, each
quarterly distribution is expected to be approximately $784,000. The Company
currently intends to make quarterly distributions in April, July and October
1998.

REPURCHASE RIGHT.

                  The Partnership Agreement provides, that beginning in 1992 and
annually thereafter, the Company will repurchase for cash up to 10% of the then
outstanding Units, to the extent Unitholders offer Units to the Company for
repurchase. The Repurchase Right entitles any Unitholder, between May 1 and June
30 of each year, to notify the Company that he elects to exercise the Repurchase
Right and have the Company acquire certain or all of his Units. The price to be
paid for any such Units is calculated based on the method provided for in the
Partnership Agreement. The Company accepted an aggregate of 81,522, 53,103 and
172,290 of its Units of limited partnership interest at a price of $4.625,
$4.50, and $5.21 per Unit pursuant to the terms of the Company's Offers to
Purchase dated April 30, 1995, 1996 and 1997, respectively. See Note 3 in the
Company's financial statement for additional information on the Repurchase
Right.


                                      -15-
<PAGE>   17


ITEM 6.   SELECTED FINANCIAL DATA
---------------------------------
<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                      --------------------------------------------------------------------------

                                          1997             1996          1995             1994           1993
                                      --------------------------------------------------------------------------

<S>                                     <C>            <C>             <C>            <C>            <C>        
Revenue . . . . . . . . . . . . . .     $15,932,197    $14,557,405     $14,478,954    $15,363,555    $14,220,201
Net Income . . . . . . . . . . . . .      5,696,407      4,227,854       5,247,086      5,915,578      4,966,312
Net Income Per Unit . . . . . . . .             .90            .65             .80            .90            .75
Total Assets  . . . . . . . . . . .      54,760,106     53,188,337      52,756,474     50,454,294     48,652,536
Debt(1). . . . . . . . . . . . . . .      4,589,143      4,405,834       4,718,207      3,800,000      4,500,000
Cash Distributions Per Unit . . . .             .50            .50             .50            .50            .50
<FN>

--------------------------
(1) Debt includes the Company's long-term debt and borrowings under the
Company's revolving credit facility.
</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------

GENERAL

                  The Company was organized in September 1990 as a limited
partnership under the laws of the State of Delaware. Everflow Management
Company, an Ohio general partnership, is the general partner of the Company. The
Company was formed to engage in the business of oil and gas exploration and
development through a proposed consolidation of the business and oil and gas
properties of EEI, and the oil and gas properties owned by certain limited
partnerships and working interest programs managed or operated by the Programs.

                  Effective February 15, 1991, pursuant to the Exchange Offer to
acquire the EEI shares and the Interests in exchange for Units of the Company's
limited partnership interest, the Company acquired the Interests and the EEI
Shares and EEI become a wholly-owned subsidiary of the Company.

                  Everflow Management Company, the general partner of the
Company, is a general partnership. The general partners of Everflow Management
Company are EMC, three individuals who are currently directors and/or officers
of EEI, David T. Matak, Thomas L. Korner and William A. Siskovic, and Sykes
Associates, a limited partnership controlled by Robert F. Sykes, the Chairman of
the Board of EEI.

LIQUIDITY AND CAPITAL RESOURCES

FINANCIAL POSITION

                  Working capital deficit of $1.6 million as of December 31,
1997 represented a $4.5 million decrease from December 31, 1996 due primarily to
the Company's $4.1 million 
                                      -16-

<PAGE>   18


borrowings under its new revolving credit facility being classified as current
compared to prior year borrowings of $4.0 million being classified as long-term.
In June 1997, the Company entered into this new revolving credit facility which
replaced all prior credit agreements. The new facility provides for a revolving
line of credit in the amount of $7,000,000, all of which is available. The
revolving line of credit provides for interest payable quarterly at LIBOR plus
175 basis points with the principal due at maturity, May 31, 1998. The Company
anticipates renewing the facility on a year to year basis to minimize debt
origination, carrying and interest costs associated with long-term bank
commitments. The Company paid down $4.3 million of debt under the revolving
credit facilities during 1997, most of which was paid during the winter and
spring months when cash flows from production were higher. The Company borrowed
$4.4 million under its revolving credit facilities during 1997. These borrowings
were used to pay for the funding of the Company's investment in the continued
development of oil and gas properties and to repurchase Units pursuant to the
Repurchase Right. The Company repurchased 172,290 Units at a price of $5.21 per
Unit, or $897,631, on June 30, 1997. The Company also used its credit facility
to make quarterly Cash Distributions during the summer and fall months. The
Company expects to continue to pursue its long-term objective of developing oil
and gas properties without jeopardizing the Company's ability to meet such
commitments as a result of production restrictions caused by the seasonal nature
of the Company's gas purchase agreements with The East Ohio Gas Company.

                  The following table summarizes the Company's financial
position at December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>

         (Amounts in Thousands)                           December 31, 1997              December 31, 1996
                                                     ---------------------------    ----------------------
                                                           Amount         %               Amount         %
                                                     ---------------------------    ----------------------

         <S>                                        <C>                 <C>        <C>                  <C>                  
         Working capital                             $  (    1,576)      (3)%       $       2,922        6%
         Property and equipment (net)                       50,240      102                48,295       93
         Other                                                 503        1                   406        1
                                                            ------    -----               -------    -----
              Total                                     $   49,167      100%        $      51,623      100%
                                                            ======    =====               =======    =====

         Long-term debt                                 $      461        1%        $       4,386        8%
         Deferred income taxes                                 128        -                   278        1
         Partners' equity                                   48,578       99                46,959       91
                                                            ------     ----                ------     ----
              Total                                     $   49,167      100%        $      51,623      100%
                                                            ======     ====                ======     ====
</TABLE>

CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES

         The Company generated almost all of its cash sources from operating
activities. During the years ended 1997 and 1996, cash provided by operations
was used to fund the development of additional oil and gas properties and
distributions to partners.

                                      -17-

<PAGE>   19


                  The following table summarizes the Company's Statements of
Cash Flows for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>


(Amounts in Thousands)                                        1997                                 1996
                                               -------------------------------------------------------------------
                                                   Dollars               %             Dollars                %
                                               -------------------------------------------------------------------
<S>                                            <C>              <C>                <C>                <C>
Operating Activities:
     Net income before adjustments             $       5,696            48%         $       4,228           42%
     Adjustments                                       5,692            48                  5,921           58
                                                  ----------    ----------             ----------    ---------
     Cash flow from operations
       before working capital
       changes                                        11,388            96                 10,149          100
     Changes in working capital                          315             3             (      648)   (       6)
                                                  ----------    ----------              ---------     --------
     Net cash provided by
       operating activities                           11,703            99                  9,501           94

Investing Activities:
     Proceeds received on receivables
       from officers and employees                       637             5                    518            5
     Advances disbursed to officers
       and employees                              (      719)   (        6)            (      477)   (       5)
     Purchase of property and
       equipment                                  (    7,809)   (       66)            (    5,509)   (      54)
     Proceeds on sale of property
       and equipment                                      23             -                     68            1
                                                  ----------    ----------             ----------    ---------
     Net cash (used) by investing
       activities                                 (    7,868)   (       67)            (    5,400)   (      53)

Financing Activities:
     Distributions                                (    3,180)   (       27)            (    3,237)   (      32)
     Repurchase of Units                          (      898)   (        8)            (      239)   (       2)
     Long-term debt issuance                           4,500            38                  4,500           44
     Long-term debt repayments                    (    4,317)   (       36)            (    4,812)   (      48)
                                                   ---------     ---------              ---------     --------
     Net cash (used) by financing
       activities                                 (    3,895)   (       33)            (    3,788)   (      38)
                                                   ---------     ---------              ---------     --------

Increase (decrease) in cash
     and equivalents                              (       60)   (        1)                   313            3
</TABLE>


Note:    All items in the previous table are calculated as a percentage of total
         cash sources. Total cash sources include the following items, if
         positive: cash flow from operations before working capital changes,
         changes in working capital, net cash provided by investing activities
         and net cash provided by financing activities, plus any decrease in
         cash and cash equivalents.


                                      -18-

<PAGE>   20

                  As the above table indicates, the Company's cash flow from
operations before working capital changes during the twelve months of 1997
represented 96% of total cash sources as compared with 100% during the twelve
months of 1996. Changes in working capital other than cash and equivalents
increased cash by $315 thousand and decreased cash by $648 thousand during 1997
and 1996, respectively. The decrease in accounts receivable at December 31, 1997
compared to December 31, 1996 is the result of lower oil prices and lower
production volumes resulting in lower production revenues receivable as of
December 31, 1997. Total production revenues receivable as of December 31, 1997
amounted to $2.0 million compared to $2.2 million at December 31, 1996. In
addition, accounts receivable from joint venture partners decreased $261
thousand from $540 thousand in 1996 to $279 thousand in 1997.

                  The Company's cash flows used by investing activities
increased $2.5 million, or 46%, during 1997 as compared with 1996. The Company's
cash flows used by investing activities decreased $2.9 million, or 35%, during
1996 as compared with 1995. The primary reason for the increase in cash flows
used by investing activities in 1997 was the increase in the purchase of
property and equipment. The purchase of property and equipment increased $2.3
million, or 42%, during 1997 as compared with 1996. In addition to the drilling
and development of 20 net wells during 1997, the Company made prepayments on
undrilled wells of $1.3 million and purchased producing properties of $1.1
million. The primary reason for the decrease in 1996 was due to the Company's
decreased activity in the purchase of property and equipment. The purchase of
property and equipment decreased $2.8 million, or 34%, during 1996 as compared
with 1995. The Company drilled and developed 23 net wells during 1996, compared
with 30 net wells in 1995.

                  The Company's cash flows used by financing activities
increased $100 thousand, or 3%, during 1997 as compared with 1996. The primary
reason for this increase was that payments on the Repurchase of Units increased
$659 thousand during 1997 and payments on long-term debt decreased $495 thousand
to $4.3 million during 1997. The Company's cash flows used by financing
activities increased $1.0 million, or 38%, during 1996 as compared with 1995.
The primary reason for this increase was that payments on long-term debt
increased $611 thousand to $4.8 million during 1996, and proceeds from the
issuance of long-term debt decreased $620 thousand to $4.5 million during 1996.
The Company had a decrease in the repurchase of Units pursuant to the Repurchase
Right of $138 thousand during 1996.

                  The Company's ending cash and equivalents balance of $680
thousand at December 31, 1997, as well as ongoing monthly operating cash flows
should be adequate to meet short-term cash requirements. The Company has
established a quarterly distribution and management believes the payment of such
distributions will continue at least through 1998. The Company has paid a
quarterly distribution every quarter since July 1991. Total cash distributions
are estimated to be $784 thousand per quarter ($.125 per Unit).

                  Capital expenditures for the development of oil and gas
properties in the Company and the acquisition of undeveloped leasehold acreage
continue to be ongoing priorities of the Company. The Company drilled or
participated in the drilling of an additional 35 drillsites in 1997. The
Company's share of these drillsites amounts to 19.8 net developed wells. The

                                      -19-
<PAGE>   21

Company also made prepayments of intangible drilling costs on 14 gross and 9.9
net wells to be drilled by March 31, 1998. Proved reserves associated with the
prepaid wells have not been determined. The Company's share of proved gas
reserves has decreased by 358 thousand MCF's, or 1%, between December 31, 1996
and 1997, while proved oil reserves have decreased by 90 thousand barrels, or
10%, between December 31, 1996 and 1997. The Company continues to develop
primarily natural gas fields, as represented by the discovery and addition of
4.1 million MCF's of natural gas versus 78 thousand barrels of crude oil during
1997. The Standardized Measure of Discounted Future Net Cash Flows of the
Company's reserves decreased by $4.4 million between December 31, 1996 and 1997.
The primary reasons for this decrease was a significant decrease in 1997 oil
prices and downward revision of previous gas and oil reserve estimates.
Management of the Company believes the Company should be able to drill or
participate in the drilling of 20 to 30 net wells each year for the next few
years. Management believes it is necessary to meet this annual objective in
order to maintain its reserve base. At the point where the Company can no longer
generate adequate and sufficient drillsite locations, debt reductions and/or
additional distributions to partners may be made by the Company at the
discretion of management.

                  The Partnership Agreement provides that the Company annually
offers to repurchase for cash up to 10% of the then outstanding Units, to the
extent Unitholders offer Units to the Company for repurchase pursuant to the
Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1
and June 30 of each year, to notify the Company of his or her election to
exercise the Repurchase Right and have the Company acquire such Units. The price
to be paid for any such Units will be calculated based upon the audited
financial statements of the Company as of December 31 of the year prior to the
year in which the Repurchase Right is to be effective and independently prepared
reserve reports. The price per Unit will be equal to 66% of the adjusted book
value of the Company allocable to the Units, divided by the number of Units
outstanding at the beginning of the year in which the applicable Repurchase
Right is to be effective less all Interim Cash Distributions received by a
Unitholder. The adjusted book value is calculated by adding partner's equity,
the Standardized Measure of Discounted Future Net Cash Flows and the tax effect
included in the Standardized Measure and subtracting from that sum the carrying
value of oil and gas properties (net of undeveloped lease costs). If more than
10% of the then outstanding Units are tendered during any period during which
the Repurchase Right is to be effective, the Investor's Units so tendered shall
be prorated for purposes of calculating the actual number of Units to be
acquired during any such period. The Company repurchased 172,290, 53,103 and
81,522 Units during 1997, 1996 and 1995 pursuant to the Repurchase Right at a
price of $5.21, $4.50 and $4.625 per Unit, respectively. The Company borrowed
against its credit facility to meet such obligations and would expect to do so
again in 1998. The Repurchase Right to be conducted in 1998 will result in
Unitholders being offered a price of $4.99 per Unit. The Company estimates it
would need to borrow $3.1 million in the event the 1998 offering pursuant to the
Repurchase Right is fully subscribed.

                  In the fall of 1997, there was a significant increase in the
price received for natural gas pursuant to the pricing adjustments contained in
the Company's Intermediate Term Adjustable Price Gas Purchase Agreements with
The East Ohio Gas Company. These pricing adjustments should increase the
Company's cash flows from operations during 1998, assuming 

                                      -20-
<PAGE>   22

similar production levels. Recent oil prices have declined considerably and will
reduce the Company's cash flows from oil production should pricing levels remain
at such levels.

RESULTS OF OPERATIONS

                  The following table and discussion is a review of the results
of operations of the Company for the twelve months ended December 31, 1997, 1996
and 1995. All items in the table are calculated as a percentage of total
revenues. This table should be read in conjunction with the discussions of each
item below:
<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                                  -----------------------------------------
                                                                   1997             1996              1995
                                                                  -----------------------------------------
<S>                                                                <C>              <C>               <C>
Revenues:
     Oil and gas sales                                               97%              97%               96%
     Well management and operating                                    3                3                 4
                                                                   ----             ----             -----
         Total Revenues                                             100              100               100
Expenses:
     Production costs                                                15               15                14
     Well management and operating                                    1                1                 2
     Depreciation, depletion and amortization                        33               35                34
     Abandonment and write down
         of oil and gas properties                                    3                5                 1
     General and administrative                                      12               13                13
     Other                                                            1                2                 1
     Income taxes                                                (    1)                 -          (    1)
                                                                     --             ------           -----
         Total Expenses                                              64               71                64
                                                                    ---              ---              ----
Net income                                                           36%              29%               36%
                                                                    ===             ====              ====
</TABLE>


                  Revenues for the year ended December 31, 1997 increased $1.4
million, or 9%, compared to the same period in 1996. Revenues for the year ended
December 31, 1996 increased $78 thousand, or 1%, compared to the same period in
1995. These increases were due primarily to changes in oil and gas sales between
the periods involved.

                  Oil and gas sales increased $1.3 million, or 10%, from 1996 to
1997. The primary reason for this increase was the result of higher gas prices
and increased production volumes for both oil and natural gas. Effective with
the November 1997 production period, the price received for natural gas covering
a majority of the Company's gas production was increased by $.59 per MCF
pursuant to the terms of the gas purchase agreements with The East Ohio Gas
Company. In addition, the Company's gas production increased by 58 thousand MCF
and oil production increased by 14 thousand barrels from 1996 to 1997. Oil and
gas sales increased $109 thousand, or 1%, from 1995 to 1996. The primary reason
for this increase in oil and gas sales between 1995 and 1996 was an increase in
oil production and oil prices. Effective with the November 1996 production
period, the price received for natural gas under the majority of these
agreements 

                                      -21-
<PAGE>   23


was increased by $.47 per MCF pursuant to the terms of the gas purchase
agreements with The East Ohio Gas Company. In addition, the Company's gas
production increased by 5 thousand MCF from 1995 to 1996.

                  Production costs increased $235 thousand, or 11%, between 1996
and 1997. The primary reasons for this increase include increased operating
costs relating to older wells and the Company's increasing costs due to placing
newly drilled wells into production. Depreciation, depletion and amortization
increased $131 thousand, or 3%, between 1996 and 1997. This increase was the
result of an increase in wells placed into production and the downward revision
of reserve estimates on certain properties. Production costs increased $160
thousand, or 8%, and depreciation, depletion and amortization increased $257
thousand, or 5%, between 1995 and 1996. The increase in oil and gas production
and sales and operating costs associated with new wells drilled are the primary
reasons for the increase in production costs from 1995 to 1996.

                  Well management and operating revenues increased $35 thousand,
or 7%, from 1996 to 1997. Well management and operating revenues increased as a
result of increasing the operating fee on operated wells during 1997. Well
management and operating costs decreased $75 thousand, or 36%, from 1996 to
1997. The reason for the decrease in well management and operating costs was due
to the purchase of oil and gas properties by the Company which previously were
only operated by the Company. These purchases during 1996 and 1997 decreased the
third party share of oil and gas properties managed and operated by the Company.
Well management and operating revenues decreased $33 thousand, or 7%, from 1995
to 1996. Well management and operating costs decreased $78 thousand, or 27%,
from 1995 to 1996.

                  Abandonments and write downs of oil and gas properties
decreased $148 thousand between 1996 and 1997 and increased $534 thousand
between 1995 and 1996. These fluctuations were attributable to the write down of
oil and gas properties, abandonments of oil and gas properties and leasehold
impairments. During 1997, the Company wrote down oil and gas properties by
approximately $199,000 to provide for impairment on certain of its oil and gas
properties. The Company also recognized leasehold impairment provisions of
approximately $325,000 in 1997. During 1996, the Company wrote down oil and gas
properties by approximately $262,000 to provide for impairment on certain of its
oil and gas properties. Additionally, in 1996, the Company wrote off
approximately $210,000 of costs associated with an unsuccessful and abandoned
water flood project.

                  General and administrative expenses increased $21 thousand, or
1%, between 1996 and 1997, while they decreased $37 thousand, or 2%, between
1995 and 1996. These relatively minor changes in general and administrative
expenses reflect the Company's ability to maintain the level of administrative
costs associated with the consolidated structure of the Company since the
Exchange Offer. Management believes the Company can maintain the current level
of overhead and related expenses.

                  Net other expenses decreased $117 thousand, or 49%, between
1996 and 1997. This decrease was partly attributed to a decrease in interest
expense resulting from lower interest rates and a reduction in the level of
outstanding debt relating to the Company's revolving credit 

                                      -22-
<PAGE>   24

facility. In addition, the Company recognized a decrease in its loss on the sale
of oil and gas properties during 1997 compared with 1996. Net other expenses
increased $81 thousand, or 51%, between 1995 and 1996. The increase between 1995
and 1996 was primarily attributable to increases in interest expense and the
loss on sale of oil and gas properties. Interest expense increased due to an
increase in the average outstanding debt relating to the Company's revolving
credit facility and additional interest expense as a result of the Company's
mortgage notes.

                  Income tax expense attributable to EEI decreased $140 thousand
between 1996 and 1997 and increased $180 thousand between 1995 and 1996. These
changes are due to the effect of timing adjustments as they relate to the
taxable income of EEI. The Company is not a tax paying entity, and the net
taxable income or loss, other than the taxable income or loss allocable to EEI,
is allocated directly to its respective partners.

                  Net income increased $1,469 thousand, or 35%, between 1996 and
1997. The increase was primarily the result of an increase in oil and gas sales.
Net income decreased $1,019 thousand, or 19%, between 1995 and 1996. The
decrease resulted from increased costs, including production costs,
depreciation, depletion and amortization, abandonment and write down costs and
income tax expense. Net income represented 36%, 29% and 36% of total revenues
during the years ended December 31, 1997, 1996 and 1995, respectively.

NEW ACCOUNTING STANDARDS

                  In March 1995, the Financial Accounting Standards Board issued
a new standard (SFAS 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS 121 requires that long-lived
assets (including oil and gas properties) and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. Everflow adopted SFAS 121 in the first
quarter of 1996 and utilizes a field by field basis for assessing impairment of
its oil and gas properties. The impact of adopting SFAS 121 was not material to
the Company's financial position or results of operation.

                  In February 1997, SFAS 128, "Earnings per Share" and SFAS
129, "Disclosure of Information About Capital Structure," were issued. SFAS 128
establishes new standards for computing and reporting earnings per share. SFAS
129 requires an entity to explain the pertinent rights and privileges of
outstanding securities. The effect of adoption of the new standards was not
significant.

                  In June 1997, SFAS 130, "Reporting Comprehensive Income," was
issued. SFAS 130 established new standards for reporting comprehensive income
and its components and is effective for fiscal years beginning after December
15, 1997. The Company expects that comprehensive income will not differ
materially from net income.

                  In June 1997, the Financial Accounting Standards Board issued
SFAS 131, "Disclosure About Segments of an Enterprise and Related Information."
SFAS 131 changes the 

                                      -23-
<PAGE>   25


standards for reporting financial results by operating segments, related
products and services, geographical areas and major customers. The Company must
adopt SFAS 131 no later than December 31, 1998. The Company believes that the
effect of adoption will not be material.

INFLATION AND CHANGES IN PRICES

                  While the cost of operations is affected by inflation, oil and
gas prices have fluctuated in recent years and generally have not matched
inflation. The price of oil in the Appalachian Basin during the Persian Gulf
crisis ranged from a low of $18.00 per barrel on July 30, 1990 to a high of
$37.50 per barrel on October 13, 1990. The price of oil in the Appalachian Basin
more recently has ranged from a low of $11.00 per barrel currently in March 1998
to a high of $23.50 in January 1997. Although the Company's sales are affected
by this type of price instability, the impact on the Company is not as dramatic
as might be expected since only 10% of the Company's total future cash inflows
related to oil and gas reserves as of December 31, 1997 are comprised of oil
reserves.

                  The various gas purchase agreements with The East Ohio Gas
Company negotiated since 1991 had provided an increase in the average gas price
obtained from the Company's natural gas sales through 1994. The average price of
gas during 1994 and 1993 amounted to $3.04 and $2.80 per MCF, respectively, a
$0.24 and $0.12 increase over 1993 and 1992. The amount of the annual price
adjustment applicable to the first price adjustment in the Intermediate Term
Adjustable Price Gas Purchase Agreements with The East Ohio Gas Company
beginning November 1993 was an increase of $.55 per MCF. The amount of the
annual price adjustment beginning November 1994 was a decrease of $.06 per MCF.
The average price of gas during 1995 amounted to $2.86 per MCF, an $.18 decrease
compared to 1994. The November 1995 annual price adjustment was a decrease of
$.50 per MCF. The average price of gas during 1996 amounted to $2.78 per MCF, an
$.08 decrease compared to 1995. The November 1996 annual price adjustment was an
increase of $.47 per MCF. The average price of gas during 1997 amounted to $3.07
per MCF, a $.29 increase compared to 1996. The November 1997 annual price
adjustment was an increase of $.59 per MCF. These adjustments to the price of
gas were based on 80% of the increase or decrease in The East Ohio Gas Company's
Gas Cost Recovery rates ("GCR") as specified in the contracts.

                  The Company's Standardized Measure of Discounted Future Net
Cash Flows decreased by $4.4 million from December 31, 1996 to December 31, 1997
and increased by $8.7 million from December 31, 1995 to December 31, 1996. A
reconciliation of the Changes in the Standardized Measures of Discounted Future
Net Cash Flows is included on page F-22 of the Company's consolidated financial
statements.


                                      -24-

<PAGE>   26

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
-------------------------------------------------
         ABOUT MARKET RISK
         -----------------
                  Not applicable.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
---------------------------------------------------

                  See attached pages F-1 to F-23.

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
-------------------------------------------------------------

                  Not applicable.




                                      -25-

<PAGE>   27




                        EVERFLOW EASTERN PARTNERS, L. P.

                       1997 CONSOLIDATED FINANCIAL REPORT






                                      F-1
<PAGE>   28


                        EVERFLOW EASTERN PARTNERS, L. P.

                                    CONTENTS


--------------------------------------------------------------------------------

                                                                   Page
                                                                   ----

AUDITORS' REPORT ON THE FINANCIAL STATEMENTS                        F-3

FINANCIAL STATEMENTS
    Consolidated balance sheets                                  F-4 - F-5 
    Consolidated statements of income                               F-6
    Consolidated statements of partners' equity                     F-7
    Consolidated statements of cash flows                        F-8 - F-9 
    Notes to consolidated financial statements                  F-10 - F-23



                                      F-2
<PAGE>   29





                          Independent Auditors' Report
                          ----------------------------


To the Partners
Everflow Eastern Partners, L. P.
Canfield, Ohio


         We have audited the accompanying consolidated balance sheets of
Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, partners' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.



                                                 HAUSSER + TAYLOR LLP



Cleveland, Ohio
March 17, 1998


                                      F-3
<PAGE>   30


                        EVERFLOW EASTERN PARTNERS, L. P.

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1997 and 1996
                           --------------------------




<TABLE>
<CAPTION>
                                                                       1997                 1996
                                                                       ----                 ----
           ASSETS
           ------


<S>                                                                 <C>                 <C>         
CURRENT ASSETS
    Cash and equivalents                                            $    679,531        $    739,370
    Accounts receivable:
      Production                                                       1,984,366           2,195,525
      Officers and employees                                           1,011,203             929,457
      Joint venture partners                                             278,641             539,852
    Other                                                                 63,418              82,824
                                                                    ------------        ------------
          Total current assets                                         4,017,159           4,487,028

PROPERTY AND EQUIPMENT
    Proved properties (successful efforts accounting method)         105,080,039          98,321,815
    Pipeline and support equipment                                       466,717             451,971
    Corporate and other                                                1,115,969           1,025,175
                                                                    ------------        ------------
                                                                     106,662,725          99,798,961
    Less accumulated depreciation, depletion, amortization
      and write down                                                  56,422,935          51,503,495
                                                                    ------------        ------------
                                                                      50,239,790          48,295,466

OTHER ASSETS                                                             503,157             405,843



                                                                    ------------        ------------

                                                                    $ 54,760,106        $ 53,188,337
                                                                    ============        ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                      F-4
<PAGE>   31


                        EVERFLOW EASTERN PARTNERS, L. P.

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1997 and 1996
                           --------------------------



<TABLE>
<CAPTION>
                                                                         1997               1996
                                                                         ----               ----
           LIABILITIES AND PARTNERS' EQUITY
           --------------------------------


<S>                                                                  <C>                <C>        
CURRENT LIABILITIES
    Current portion of long-term debt                                $    27,936        $    19,600
    Revolving credit facility                                          4,100,000                  -
    Accounts payable                                                   1,207,268          1,246,050
    Accrued expenses                                                     257,893            298,980
                                                                     -----------        -----------
        Total current liabilities                                      5,593,097          1,564,630

LONG-TERM DEBT, NET OF CURRENT PORTION
    Term debt                                                            461,207            386,234
    Revolving credit facility                                                  -          4,000,000
                                                                     -----------        -----------
                                                                         461,207          4,386,234

DEFERRED INCOME TAXES                                                    128,000            278,000

COMMITMENTS AND CONTINGENCIES

LIMITED PARTNERS' EQUITY, SUBJECT TO REPURCHASE
    RIGHT
      Authorized - 8,000,000 units
      Issued and outstanding - 6,207,651 and 6,379,941 units,
        respectively                                                  48,058,020         46,471,094

GENERAL PARTNER'S EQUITY                                                 519,782            488,379
                                                                     -----------        -----------
         Total partners' equity                                       48,577,802         46,959,473
                                                                     -----------        -----------
                                                                     $54,760,106        $53,188,337
                                                                     ===========        ===========
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                      F-5
<PAGE>   32


                        EVERFLOW EASTERN PARTNERS, L. P.

                        CONSOLIDATED STATEMENTS OF INCOME

                  Years Ended December 31, 1997, 1996 and 1995
                  --------------------------------------------



<TABLE>
<CAPTION>
                                                             1997                  1996                1995
                                                             ----                  ----                ----
<S>                                                      <C>                  <C>                  <C>         
REVENUES
    Oil and gas sales                                    $ 15,418,755         $ 14,078,491         $ 13,969,378
    Well management and operating                             510,039              474,851              507,873
    Other                                                       3,403                4,063                1,703
                                                         ------------         ------------         ------------
                                                           15,932,197           14,557,405           14,478,954

DIRECT COST OF REVENUES
    Production costs                                        2,427,124            2,192,349            2,032,706
    Well management and operating                             132,531              207,951              286,206
    Depreciation, depletion and amortization                5,287,066            5,155,681            4,898,667
    Abandonment and write down of oil and gas
      properties                                              523,513              671,992              137,587
                                                         ------------         ------------         ------------
          Total direct cost of revenues                     8,370,234            8,227,973            7,355,166

GENERAL AND ADMINISTRATIVE EXPENSE                          1,891,515            1,870,646            1,907,188
                                                         ------------         ------------         ------------
         Total cost of revenues                            10,261,749           10,098,619            9,262,354
                                                         ------------         ------------         ------------

INCOME FROM OPERATIONS                                      5,670,448            4,458,786            5,216,600

OTHER INCOME (EXPENSE)
    Interest income                                            86,226               78,668               71,516
    Interest expense                                         (219,896)            (262,659)            (218,496)
    Gain (loss) on sale of property and equipment               9,629              (56,941)             (12,534)
                                                         ------------         ------------         ------------
                                                             (124,041)            (240,932)            (159,514)
                                                         ------------         ------------         ------------

INCOME BEFORE INCOME TAXES                                  5,546,407            4,217,854            5,057,086

PROVISION (CREDIT) FOR INCOME TAXES
    Deferred                                                 (150,000)             (10,000)            (190,000)
                                                         ------------         ------------         ------------

NET INCOME                                               $  5,696,407         $  4,227,854         $  5,247,086
                                                         ============         ============         ============


Allocation of Partnership Net Income
    Limited Partners                                     $  5,636,318         $  4,184,053         $  5,193,251
    General Partner                                            60,089               43,801               53,835
                                                         ------------         ------------         ------------

                                                         $  5,696,407         $  4,227,854         $  5,247,086
                                                         ============         ============         ============

Earnings per unit                                        $        .90         $        .65         $        .80
                                                         ============         ============         ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.



                                      F-6
<PAGE>   33


                        EVERFLOW EASTERN PARTNERS, L. P.

                   CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY

                  Years Ended December 31, 1997, 1996 and 1995
                  --------------------------------------------



<TABLE>
<CAPTION>
                                                            1997                 1996                 1995
                                                            ----                 ----                 ----


<S>                                                     <C>                  <C>                  <C>         
PARTNERS' EQUITY - JANUARY 1                            $ 46,959,473         $ 46,207,378         $ 44,617,973


    Net income                                             5,696,407            4,227,854            5,247,086


    Cash distributions ($.50 per unit each year)          (3,180,447)          (3,236,795)          (3,280,642)


    Purchase and retirement of Units                        (897,631)            (238,964)            (377,039)
                                                        ------------         ------------         ------------

PARTNERS' EQUITY - DECEMBER 31                          $ 48,577,802         $ 46,959,473         $ 46,207,378
                                                        ============         ============         ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                      F-7
<PAGE>   34


                        EVERFLOW EASTERN PARTNERS, L. P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  Years Ended December 31, 1997, 1996 and 1995
                  --------------------------------------------


<TABLE>
<CAPTION>
                                                                   1997                 1996                  1995
                                                                   ----                 ----                  ----
<S>                                                            <C>                  <C>                  <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                 $  5,696,407         $  4,227,854         $  5,247,086
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation, depletion and amortization                  5,327,791            5,202,435            4,935,223
        Abandonment and write down of oil and gas
          properties                                                523,513              671,992              137,587
        (Gain) loss on sale of property and equipment                (9,629)              56,941               12,534
        Deferred income taxes                                      (150,000)             (10,000)            (190,000)
        Changes in assets and liabilities:
          Accounts receivable                                       472,370             (348,299)             567,230
          Other current assets                                       19,406               (6,925)               6,961
          Other assets                                              (97,314)            (294,932)             (81,007)
          Accounts payable                                          (38,782)               2,220              (17,952)
          Accrued expenses                                          (41,087)                 (79)               2,520
                                                               ------------         ------------         ------------
            Total adjustments                                     6,006,268            5,273,353            5,373,096
                                                               ------------         ------------         ------------
              Net cash provided by operating activities          11,702,675            9,501,207           10,620,182

CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds received on receivables from officers and
      employees                                                     637,434              517,652              557,206
    Advances disbursed to officers and employees                   (719,180)            (477,500)            (608,675)
    Purchase of property and equipment                           (7,809,435)          (5,508,792)          (8,303,950)
    Proceeds on sale of property and equipment                       23,436               68,192               44,486
                                                               ------------         ------------         ------------
         Net cash used by investing activities                   (7,867,745)          (5,400,448)          (8,310,933)

CASH FLOWS FROM FINANCING ACTIVITIES
    Distributions                                                (3,180,447)          (3,236,795)          (3,280,642)
    Repurchase of Units                                            (897,631)            (238,964)            (377,039)
    Proceeds from issuance of debt including revolver
      activity                                                    4,500,000            4,500,000            5,120,000
    Payments on debt including revolver activity                 (4,316,691)          (4,812,373)          (4,201,793)
                                                               ------------         ------------         ------------
        Net cash used by financing activities                    (3,894,769)          (3,788,132)          (2,739,474)
                                                               ------------         ------------         ------------

NET INCREASE (DECREASE) IN CASH AND
    EQUIVALENTS                                                     (59,839)             312,627             (430,225)

CASH AND EQUIVALENTS - JANUARY 1                                    739,370              426,743              856,968
                                                               ------------         ------------         ------------

CASH AND EQUIVALENTS - DECEMBER 31                             $    679,531         $    739,370         $    426,743
                                                               ============         ============         ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.


                                      F-8
<PAGE>   35

                        EVERFLOW EASTERN PARTNERS, L. P.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years Ended December 31, 1997, 1996 and 1995
                  --------------------------------------------




<TABLE>
<CAPTION>
                                                            1997            1996            1995
                                                            ----            ----            ----
<S>                                                       <C>             <C>             <C>     
Supplemental disclosures of cash flow information:
    Cash paid during the year for:
      Interest                                            $250,831        $223,286        $169,739
      Income taxes                                             -               -               -
</TABLE>


 Supplemental disclosure of noncash investing and financing activities:

     See notes to financial statements for noncash investing and financing
     information on the Company's equity transactions and bank borrowings.







   The accompanying notes are an integral part of these financial statements.



                                      F-9
<PAGE>   36


                        EVERFLOW EASTERN PARTNERS, L. P.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         A.       Organization - Everflow Eastern Partners, L. P. ("Everflow")
                  is a Delaware limited partnership which was organized in
                  September 1990 to engage in the business of oil and gas
                  exploration and development. Everflow was formed to
                  consolidate the business and oil and gas properties of
                  Everflow Eastern, Inc. ("EEI") and subsidiaries and the oil
                  and gas properties owned by certain limited partnership and
                  working interest programs managed or sponsored by EEI ("EEI
                  Programs" or "the Programs").

                  Everflow offered to exchange (the "Exchange Offer") its Units
                  of limited partnership interest for the common shares of EEI
                  and the interests of the Investors in the Programs
                  (collectively, the "Interests"). The Exchange Offer was made
                  pursuant to a Registration Statement on Form S-1 declared
                  effective by the Securities and Exchange Commission on
                  December 19, 1990 and the Prospectus dated December 19, 1990
                  as filed with the Commission pursuant to Rule 424(b).

                  The Exchange Offer terminated on February 15, 1991 and holders
                  of Interests with an aggregate Exchange Value of $66,996,249
                  accepted the offer and tendered their Interests. Effective on
                  such date, Everflow acquired these Interests, which include
                  partnership interests and working interests in the Programs,
                  and all of the outstanding EEI shares. Of these Interests
                  tendered in the Exchange Offer, $28,565,244 was represented by
                  the EEI shares and $38,431,005 by the remaining Interests.
                  Approximately 6,632,000 of Everflow's Units were issued
                  pursuant to the Exchange Offer.

                  The tax-free combination of the Programs and EEI with Everflow
                  was accounted for as a reorganization of affiliated entities
                  under common control. Accordingly, the accompanying financial
                  statements reflect the historical costs of the Programs and
                  EEI.

                  Everflow Management Company, an Ohio general partnership, is
                  the general partner of Everflow. Everflow Management Company
                  is authorized, in general, to perform all acts necessary or
                  desirable to carry out the purposes and conduct of the
                  business of Everflow.

                  The partners of Everflow Management Company are Everflow
                  Management Corporation ("EMC"), three individuals who are
                  Officers and Directors of EEI and Sykes Associates, a limited
                  partnership controlled by Robert F. Sykes, the Chairman of the
                  Board of EEI. EMC is an Ohio corporation formed in September
                  1990 and is the managing general partner of Everflow
                  Management Company.

         B.       Principles of Consolidation - The consolidated financial
                  statements include the accounts of Everflow, its wholly-owned
                  subsidiaries, including EEI and EEI's wholly-owned
                  subsidiaries, and investments in oil and gas drilling and
                  income partnerships (collectively, the "Company") which are
                  accounted for under the proportional consolidation method. All
                  significant accounts and transactions between the consolidated
                  entities have been eliminated.


                                      F-10
<PAGE>   37


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         C.       Use of Estimates - The preparation of financial statements in
                  conformity with generally accepted accounting principles
                  requires management to make estimates and assumptions that
                  affect the reported amounts of assets and liabilities and
                  disclosure of contingent assets and liabilities at the date of
                  the financial statements and the reported amounts of revenues
                  and expenses during the reporting period. Actual results could
                  differ from those estimates.

         D.       Fair Value of Financial Instruments - The fair values of cash,
                  accounts receivable, accounts payable and other short-term
                  obligations approximate their carrying values because of the
                  short maturity of these financial instruments. The carrying
                  values of the Company's long-term obligations approximate
                  their fair value. In accordance with Statement of Financial
                  Accounting Standards No. 107, "Disclosure About Fair Value of
                  Financial Instruments," rates available at balance sheet dates
                  to the Company are used to estimate the fair value of existing
                  debt.

         E.       Cash Equivalents - For purposes of the statement of cash
                  flows, the Company considers all highly liquid debt
                  instruments purchased with a maturity of three months or less
                  to be cash equivalents. The Company maintains at various
                  financial institutions cash and cash equivalents which may
                  exceed federally insured amounts and which may, at times,
                  significantly exceed balance sheet amounts due to float.

         F.       Property and Equipment - The Company uses the successful
                  efforts method of accounting for oil and gas exploration and
                  production activities. Under successful efforts, costs to
                  acquire mineral interests in oil and gas properties and to
                  drill and equip development wells are initially capitalized.
                  Costs of development wells (on properties the Company has no
                  further interest in) that do not find proved reserves and
                  geological and geophysical costs are expensed. The Company has
                  not participated in exploratory drilling and owns no interest
                  in unproved properties.

                  Capitalized costs of proved properties, after considering
                  estimated dismantlement and abandonment costs and estimated
                  salvage values, are amortized by the unit-of-production method
                  based upon estimated proved developed reserves. Depletion,
                  depreciation and amortization on proved properties amounted to
                  $5,254,190, $5,127,388 and $4,874,691 for the years ended
                  December 31, 1997, 1996 and 1995, respectively.

                  On sale or retirement of a unit of a proved property (which
                  generally constitutes the amortization base), the cost and
                  related accumulated depreciation, depletion, amortization and
                  writedown are eliminated from the property accounts, and the
                  resultant gain or loss is recognized.

                  Pipeline and support equipment and other corporate property
                  and equipment are depreciated principally on the straight-line
                  method over their estimated useful lives (pipeline and support
                  equipment - 10 years, other corporate equipment - 3 to 7
                  years, other corporate property - building and improvements
                  with a cost of $733,000 - 39 years). Depreciation on pipeline
                  and support equipment and other corporate property and
                  equipment amounted to $73,601, $75,047 and $60,532 for the
                  years ended December 31, 1997, 1996 and 1995, respectively.


                                      F-11
<PAGE>   38

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         F.       Property and Equipment (Continued)

                  Maintenance and repairs of property and equipment are expensed
                  as incurred. Major renewals and improvements are capitalized,
                  and the assets replaced are retired.

         G.       Revenue Recognition - The Company recognizes revenue from oil
                  and gas production as it is extracted and sold from the
                  properties. Other revenue is recognized at the time it is
                  earned and the Company has a contractual right to such
                  revenue.

                  The Company participates (and may act as drilling contractor)
                  with unaffiliated joint venture partners in the drilling,
                  development and operation of jointly owned oil and gas
                  properties. Each owner, including the Company, has an
                  undivided interest in the jointly owned property(ies).
                  Generally, the joint venture partners participate on the same
                  drilling/development cost basis as the Company and, therefore,
                  no revenue, expense or income is recognized on the drilling
                  and development of the properties. Accounts receivable from
                  joint venture partners consist principally of drilling and
                  development costs the Company has advanced or incurred on
                  behalf of joint venture partners. The Company will earn and
                  receive monthly management and operating fees from certain
                  joint venture partners after the properties are completed and
                  placed into production.

         H.       Income Taxes - Everflow is not a tax-paying entity and the net
                  taxable income or loss, other than the taxable income or loss
                  allocable to EEI, which is a C corporation owned by Everflow,
                  will be allocated directly to its respective partners. The
                  Company is not able to determine the net difference between
                  the tax bases and the reported amounts of Everflow's assets
                  and liabilities due to separate tax elections that were made
                  by owners of the working interests and limited partnership
                  interests that comprised Programs.

                  EEI and its subsidiaries account for income taxes under
                  Statement of Financial Accounting Standards No. 109 (SFAS
                  109), "Accounting for Income Taxes." Income taxes are provided
                  for all items (as they relate to EEI and its subsidiaries) in
                  the Consolidated Statement of Income regardless of the period
                  when such items are reported for income tax purposes. SFAS 109
                  provides that deferred tax assets and liabilities be
                  recognized for temporary differences between the financial
                  reporting basis and tax basis of certain of EEI's and its
                  subsidiaries' assets and liabilities. In addition, SFAS 109
                  requires that deferred tax assets and liabilities be measured
                  using enacted tax rates expected to apply to taxable income in
                  the years in which the temporary differences are expected to
                  be recovered or settled. The impact on deferred taxes of
                  changes in tax rates and laws, if any, is reflected in the
                  financial statements in the period of enactment. In some
                  situations, SFAS 109 permits the recognition of expected
                  benefits of utilizing net operating loss and tax credit
                  carryforwards.


                                      F-12
<PAGE>   39

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         I.       Allocation of Income and Per Unit Data - Under the terms of
                  the limited partnership agreement, initially, 99% of revenues
                  and costs are allocated to the Unitholders (the limited
                  partners) and 1% of revenues and costs are allocated to the
                  General Partner. Such allocation changes as Unitholders elect
                  to exercise the Repurchase Right (see Note 3).

                  Earnings and distributions per limited partner Unit have been
                  computed based on the weighted average number of Units
                  outstanding during the year for each year presented. Average
                  outstanding Units for earnings and distributions per Unit
                  calculations amount to 6,293,796, 6,406,492 and 6,476,150 in
                  1997, 1996 and 1995, respectively.

         J.       New Accounting Standards - In March 1995, the Financial
                  Accounting Standards Board issued a new standard (SFAS 121),
                  "Accounting for the Impairment of Long-Lived Assets and for
                  Long-Lived Assets to be Disposed Of." SFAS 121 requires that
                  long-lived assets (including oil and gas properties) and
                  certain identifiable intangibles to be held and used by an
                  entity be reviewed for impairment whenever events or changes
                  in circumstances indicate that the carrying amount of an asset
                  may not be recoverable. SFAS 121 is effective for financial
                  statements for fiscal years beginning after December 15, 1995.
                  Everflow adopted SFAS 121 in the first quarter of 1996 and
                  utilizes a field by field basis for assessing impairment of
                  its oil and gas properties. The effect of adopting SFAS 121
                  was not material to the Company's financial position or
                  results of operations. The Company wrote down oil and gas
                  properties by approximately $199,000 and $262,000 during 1997
                  and 1996, respectively, to provide for impairment on certain
                  of its oil and gas properties. Additionally, in 1996, the
                  Company wrote off approximately $210,000 of costs associated
                  with an unsuccessful and abandoned water flood project.

                  In February 1997, SFAS 128, "Earnings per Share" and SFAS 129,
                  "Disclosure of Information About Capital Structure," were
                  issued. SFAS 128 establishes new standards for computing and
                  reporting earnings per share. SFAS 129 requires an entity to
                  explain the pertinent rights and privileges of outstanding
                  securities. The effect of adoption of the new standards was
                  not significant.

                  In June 1997, SFAS 130, "Reporting Comprehensive Income," was
                  issued. SFAS 130 established new standards for reporting
                  comprehensive income and its components and is effective for
                  fiscal years beginning after December 15, 1997. The Company
                  expects that comprehensive income will not differ materially
                  from net income.

                  In June 1997, the Financial Accounting Standards Board issued
                  SFAS 131, "Disclosure About Segments of an Enterprise and
                  Related Information." SFAS 131 changes the standards for
                  reporting financial results by operating segments, related
                  products and services, geographical areas and major customers.
                  The Company must adopt SFAS 131 no later than December 31,
                  1998. The Company believes that the effect of adoption will
                  not be material.

         K.       Reclassifications - Certain reclassifications were made to
                  prior period financial statement presentations to conform with
                  current period presentations.


                                      F-13
<PAGE>   40


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 2.  CREDIT FACILITIES AND LONG-TERM DEBT

         In June 1997, the Company entered into an agreement that replaced all
         prior credit agreements. The credit agreement provides for a revolving
         line of credit in the amount of $7,000,000, all of which is available.
         The revolving line of credit provides for interest payable quarterly at
         LIBOR plus 175 basis points with the principal due at maturity, May 31,
         1998. The Company anticipates renewing the facility on a year to year
         basis to minimize debt origination, carrying and interest costs
         associated with long-term bank commitments. The previous credit
         agreement contained generally the same terms, except that interest was
         payable at prime plus 1/8% and the facility was considered long-term.
         Borrowings under the facility are unsecured; however, the Company has
         agreed, if requested by the bank, to execute any supplements to the
         agreement including security and mortgage agreements on the Company's
         assets. The agreement contains restrictive covenants requiring the
         Company to maintain the following: (i) loan balance not to exceed the
         borrowing base of $7,000,000; (ii) tangible net worth of at least
         $40,000,000; and (iii) a total debt to tangible net worth ratio of not
         more than 0.5 to 1.0. In addition, there are restrictions on mergers,
         sales and acquisitions, the incurrence of additional debt and the
         pledge or mortgage of the Company's assets.

         Borrowings on revolving credit facilities amounted to $4,100,000 and
         $4,000,000 at December 31, 1997 and 1996, respectively. The following
         schedule reflects activity under the Company's revolving credit
         facilities for the years ended December 31, 1997, 1996 and 1995. The
         average amount outstanding under the facility was calculated using
         daily balances and a 365 day period. The weighted average interest
         rates were calculated by dividing the interest expense for the year for
         such borrowings by the average amounts outstanding during the period.


<TABLE>
<CAPTION>
                                                                                             Weighted
                                                           Maximum            Average         Average
                                                            Amount            Amount         Interest
                                                         Outstanding        Outstanding        Rate
                                                         -----------        -----------        ----

<S>                                                   <C>                 <C>                  <C> 
                    Year Ended December 31:
                        1997                          $    4,100,000      $    1,796,986       8.0%

                        1996                          $    4,800,000      $    2,645,479       8.4%

                        1995                          $    4,400,000      $    2,235,000       9.0%
</TABLE>


         For purposes of the Company's borrowings LIBOR was 5.93% at December
         31, 1997 and the prime rate was 8.25% and 8.50% at December 31, 1996
         and 1995, respectively.

         The Company purchased a building and funded its cost, including
         improvements, in part, through mortgage notes. Two of the notes, which
         have an aggregate balance of $388,979 and $405,834 at December 31, 1997
         and 1996, respectively, bear interest at 8.22% per annum until October
         6, 1998 and then a variable rate of .5% above prime until maturity. A
         third note, which has a balance of $100,164 at December 31, 1997, bears
         interest at 8.41% per annum until June 25, 2000 and then a variable
         rate of .5% above prime until maturity. The notes require aggregate
         payments of principal and interest of $5,636 per month. Maturities on
         the notes are expected to be as follows: 1998 - $27,900, 1999 -
         $30,300; 2000 - $33,000; 2001 - $35,900; 2002 - $39,100; thereafter -
         $322,943.


                                      F-14
<PAGE>   41


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 3.  PARTNERS' EQUITY

         Units represent limited partnership interests in Everflow. The Units
         are transferable subject only to the approval of any transfer by
         Everflow Management Company and to the laws governing the transfer of
         securities. The Units are not listed for trading on any securities
         exchange nor are they quoted in the automated quotation system of a
         registered securities association. However, Unitholders have an
         opportunity to require Everflow to repurchase their Units pursuant to
         the Repurchase Right.

         Under the terms of the limited partnership agreement, initially, 99% of
         revenues and costs are allocated to the Unitholders (the limited
         partners) and 1% of revenues and costs are allocated to the General
         Partner. Such allocation has changed and will change in the future due
         to Unitholders electing to exercise the Repurchase Right.

         The partnership agreement provides that Everflow will repurchase for
         cash up to 10% of the then outstanding Units, to the extent Unitholders
         offer Units to Everflow for repurchase pursuant to the Repurchase
         Right. The Repurchase Right entitles any Unitholder, between May 1 and
         June 30 of each year, to notify Everflow that he elects to exercise the
         Repurchase Right and have Everflow acquire certain or all of his Units.
         The price to be paid for any such Units will be calculated based upon
         the audited financial statements of the Company as of December 31 of
         the year prior to the year in which the Repurchase Right is to be
         effective and independently prepared reserve reports. The price per
         Unit will be equal to 66% of the adjusted book value of the Company
         allocable to the Units, divided by the number of Units outstanding at
         the beginning of the year in which the applicable Repurchase Right is
         to be effective less all Interim Cash Distributions received by a
         Unitholder. The adjusted book value is calculated by adding partners'
         equity, the Standardized Measure of Discounted Future Net Cash Flows
         and the tax effect included in the Standardized Measure and subtracting
         from that sum the carrying value of oil and gas properties (net of
         undeveloped lease costs). If more than 10% of the then outstanding
         Units are tendered during any period during which the Repurchase Right
         is to be effective, the Investors' Units so tendered shall be prorated
         for purposes of calculating the actual number of Units to be acquired
         during any such period. The price associated with the Repurchase Right,
         based upon the December 31, 1997 calculation, is estimated to be $4.99
         per Unit, net of the distributions ($.25 per Unit in total) expected to
         be made in January and April 1998.

         Units repurchased pursuant to the Repurchase Right, for each of the
         four years in the period ended December 31, 1997, are as follows:

<TABLE>
<CAPTION>
                                       Per Unit
           ----------------------------------------------------------------
                    Calculated                                                                       Units
                    Price for                       Less                                          Outstanding
                    Repurchase      Premium        Interim           Net          # of Units        Following
           Year       Right         Offered     Distributions     Price Paid      Repurchased      Repurchase
           ----     ----------      -------     -------------     ----------      -----------     -----------
<S>                  <C>            <C>           <C>             <C>                <C>            <C>      
           1994      $   4.80       $    -        $    .25        $    4.55          26,958         6,514,566

           1995      $   4.72       $  .28        $   .375        $   4.625          81,522         6,433,044

           1996      $   4.48       $  .27        $    .25        $    4.50          53,103         6,379,941

           1997      $   5.46       $    -        $    .25        $    5.21         172,290         6,207,651
</TABLE>


                                      F-15
<PAGE>   42


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4.  PROVISION FOR INCOME TAXES

         As referred to in Note 1, EEI and its subsidiaries account for current
         and deferred income taxes under the provisions of SFAS No. 109. The
         deferred taxes are the result of temporary differences arising from
         differences in financial reporting and tax reporting methods for
         EEI's proved properties.

         A reconciliation between taxes computed at the Federal statutory rate
         and the effective tax rate in the statements of income follows:

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                            --------------------------------------------------------------------
                                                     1997                    1996                    1995
                                            ----------------------   --------------------   --------------------
                                               Amount          %        Amount        %        Amount         %
                                               ------          -        ------        -        ------         -
<S>                                        <C>              <C>      <C>            <C>     <C>            <C>  
         Provision based on the
             statutory rate (for taxable
             income up to $10,000,000)     $    1,886,000    34.0    $  1,434,000    34.0   $ 1,719,000     34.0

         Tax effect of:
             Non-taxable status of the
               Programs and Everflow           (1,891,000)  (34.1)     (1,368,000)  (32.4)   (1,688,000)   (33.4)
             Excess statutory depletion           (95,000)   (1.7)        (90,000)   (2.1)     (102,000)    (2.0)
             Graduated tax rates, state                                           
               income tax and other - net         (50,000)   (0.9)         14,000     0.3      (119,000)    (2.4)
                                           --------------    ----    ------------    ----   -----------     ----
                     Total                 $     (150,000)   (2.7)   $    (10,000)   (0.2)  $  (190,000)    (3.8)
                                           ==============    ====    ============    ====   ===========     ====
</TABLE>


         EEI has percentage depletion deduction carryforwards for tax purposes
         of approximately $2,400,000. These carryforwards can be carried forward
         indefinitely. For financial reporting purposes, the deferred tax
         liability at December 31, 1997 and 1996, has been reduced by
         approximately $820,000 and $680,000, respectively, for the tax effect
         of carryforwards.

NOTE 5.  RETIREMENT PLAN

         The Company has a defined contribution plan pursuant to Section 401(K)
         of the Internal Revenue Code for all employees who have reached the age
         of 21 and completed one year of service. Contributions to the plan are
         at the discretion of EMC's Board of Directors. The Company made
         contributions of $88,788, $38,595 and $35,815 for the years ended
         December 31, 1997, 1996 and 1995, respectively.

NOTE 6.  RELATED PARTY TRANSACTIONS

         Since 1989, EEI provided certain employees with an opportunity to
         receive assignments of certain overriding royalty interests which were
         created at the time EEI generated an oil and gas lease for acquisition
         by oil and gas drilling programs. Not all leases generated and acquired
         by such Programs had an overriding royalty interest reserved for
         assignment to employees. Certain employees of the Company have been
         given the option of having a portion of their compensation in the form
         of an assignment in certain of such overriding royalty interests. Those
         employees who elect to receive a portion of their compensation in this
         form receive an assignment of a pro rata portion of each of the
         overriding royalty interests selected. During the calendar years ended
         December 31, 1997, 1996 and 1995, approximately $175,000, $121,000 and
         $199,000, respectively, was distributed to such employees from such
         overriding royalty interests.


                                      F-16
<PAGE>   43


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 6.  RELATED PARTY TRANSACTIONS (CONTINUED)

         The Company's Officers, Directors, Affiliates and certain employees
         have frequently participated, and will likely participate in the
         future, as working interest owners in wells in which the Company has an
         interest. Frequently, the Company has loaned the funds necessary to
         participate in the drilling and development of such wells. Such loans
         currently accrue interest at the prime rate plus 1% per annum. Such
         receivables are expected to be paid from production revenues
         attributable to such interests or through joint interest assessments.

NOTE 7. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS

         The Company operates exclusively in the United States, almost entirely
         in Ohio and Pennsylvania, in the exploration, development and
         production of oil and gas.

         The Company operates in an environment with many financial risks,
         including, but not limited to, the ability to acquire additional
         economically recoverable oil and gas reserves, the inherent risks of
         the search for, development of and production of oil and gas, the
         ability to sell oil and gas at prices which will provide attractive
         rates of return, the volatility and seasonality of oil and gas prices,
         and the highly competitive and, at times, seasonal nature of the
         industry and worldwide economic conditions. The Company's ability to
         expand its reserve base and diversify its operations is also dependent
         upon the Company's ability to obtain the necessary capital through
         operating cash flow, additional borrowings or additional equity funds.
         Various federal, state and governmental agencies are considering, and
         some have adopted, laws and regulations regarding environmental
         protection which could adversely affect the proposed business
         activities of the Company. The Company cannot predict what effect, if
         any, current and future regulations may have on the operations of the
         Company.

         Approximate percentages of oil and gas sales from purchasers who
         represented greater than 10% of total oil and gas sales for the years
         ended December 31, 1997, 1996 and 1995, respectively, were as follows:

<TABLE>
<CAPTION>
                                Customer                                  1997       1996       1995
                                --------                                  ----       ----       ----


<S>                                                                       <C>         <C>       <C>
                    The East Ohio Gas Company                             70%         72%       77%
                    Quaker State Refining Corporation                     10          12        11
                                                                          --          --        -- 

                                                                          80%         84%       88%
                                                                          ==          ==        == 
</TABLE>



                                      F-17
<PAGE>   44

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 7.  BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)

         The Company has various Intermediate Term Adjustable Price Gas Purchase
         Agreements (the "East Ohio Contracts") with The East Ohio Gas Company
         ("East Ohio"). Pursuant to the East Ohio Contracts and subject to
         certain restrictions and adjustments, including termination clauses,
         East Ohio is obligated to purchase, and the Company is obligated to
         sell, all natural gas production from a specified list of wells (the
         "Contract Wells"). A summary of Everflow's principal East Ohio Gas
         Contracts at December 31, 1997 follows:

<TABLE>
<CAPTION>
            Contract     Period          Number       Required          Shut-In             Limitation
              Date      Covered         of Wells      Purchases        Provisions           Provisions
              ----      -------         --------      ---------        ----------           ----------

<S>                   <C>                  <C>      <C>               <C>                <C>
            9/3/91    11/91-10/01          438      275 days/year     Maximum of         May-Oct. - 50% of
                                                                      60 days (Nov.-     production from
                                                                      April)             prior 6 month period

           3/10/94     4/94-3/00            49      275 days/year     Maximum of         May-Oct. - 50% of
                                                                      60 days (Nov.-     production from
                                                                      April)             prior 6 month period

           8/10/94    11/94-10/00           28       Nov.-March        April-Oct.        Shut-in provisions
</TABLE>


<TABLE>
<CAPTION>
                                                      Net Price per MCF
                     --------------------------------------------------------------------------------------------
                          Initially                             Adjusted Prices
            Contract -------------------- -----------------------------------------------------------------------
             Date    Nov.-April  May-Oct. 11/95-4/96  5/96-10/96   11/96-4/97  5/97-10/97  11/97-4/98  5/98-10/98
             ----    ----------  -------- ----------  ----------   ----------  ----------  ----------  ----------

<S>          <C> <C>  <C>        <C>        <C>         <C>          <C>         <C>         <C>         <C>   
             9/3/91   $ 2.85     $ 2.22     $ 2.84      $ 2.21       $ 3.31      $ 2.68      $ 3.90      $ 3.27

            3/10/94   $ 2.98     $ 2.28     $ 2.48      $ 1.78       $ 2.95      $ 2.25      $ 3.54      $ 2.84

            8/10/94   $ 3.08       N/A      $ 2.82        N/A        $ 3.55        N/A       $ 4.14        N/A
</TABLE>

         As detailed above, the price paid for natural gas purchased under the
         East Ohio Contracts varies with the production period. Pricing under
         the East Ohio Contracts is adjusted annually (after the first
         adjustment), up or down, by an amount equal to 80% of the increase or
         decrease in East Ohio's average Gas Cost Recovery ("GCR") rates.
         Additionally, the 8/10/94 contract provides for a price cap equal to
         the quarterly GCR, which amounted to $4.20, $4.05 and $3.00 in November
         1997, 1996 and 1995, respectively. The net price per MCF includes $.20
         per MCF for transportation less a $.02 per MCF metering charge.

         In addition to the East Ohio Contracts described above, the Company has
         various short-term contracts (covering production from 59 gross wells
         at December 31, 1997) which have a primary term of one year. Forty of
         the wells are covered by fixed price contracts that provide for the
         sale of the Company's gas at $2.70 to $2.95 per MCF. The remaining
         nineteen wells are covered by a variable rate contract that provides
         for the sale of the Company's gas based on a monthly NYMEX settlement,
         with no floor price provisions, plus $.52 per MCF (including
         transportation allowances). There are no significant production
         restrictions under the Company's short-term contracts as they relate to
         the Company's existing wells. Future wells can be added to certain of
         the contracts subject to gross production restrictions under the
         contracts.


                                      F-18
<PAGE>   45

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 7.  BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)

         In January 1993, the Company entered into a 3 year crude oil purchase
         agreement with Quaker State Refining Corporation ("Quaker State"). The
         agreement provides for the sale of significantly all of the Company's
         crude oil production to Quaker State at a premium price of $.40 or $.80
         per barrel over Quaker State's posted price. The Company was entitled
         to the premium provided it made available to Quaker State its product
         in 80 ($.40 premium) or 160 ($.80 premium) barrel minimum quantities.
         The provisions of this agreement are now customary for crude oil
         production purchased in the Appalachian Basin. As a result, the Company
         expects to continue to receive pricing consistent with the terms of the
         agreement without a formal agreement in place.

         The Company expects that East Ohio and Quaker State will be the only
         major customers in 1998.

NOTE 8.  COMMITMENTS AND CONTINGENCIES

         Everflow paid a dividend in January 1998 of $.125 per Unit. The
         distribution amounted to approximately $784,000.

         The Company is the General Partner in certain oil and gas partnerships.
         As General Partner, the Company shares in unlimited liability to third
         parties with respect to the operations of the Partnerships and may be
         liable to limited partners for losses attributable to breach of
         fiduciary obligations.

NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED)

         The following supplemental unaudited oil and gas information is
         required by Statement of Financial Accounting Standards (SFAS) No. 69,
         "Disclosures About Oil and Gas Producing Activities."

         The tables on the following pages set forth pertinent data with respect
         to the Company's oil and gas properties, all of which are located
         within the continental United States.

                    CAPITALIZED COSTS RELATING TO OIL AND GAS
                              PRODUCING ACTIVITIES

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                           ------------------------------------------------------
                                                                  1997                1996                1995
                                                                  ----                ----                ----

<S>                                                        <C>                   <C>                <C>          
                 Proved oil and gas properties             $    105,080,039      $    98,321,815    $  95,362,378
                 Pipeline and support equipment                     466,717              451,971          426,500
                                                           ----------------      ---------------    -------------
                                                                105,546,756           98,773,786       95,788,878
                 Accumulated depreciation,
                     depletion, amortization
                     and write down                              56,192,136           51,286,350       47,598,650
                                                           ----------------      ---------------    -------------

                 Net capitalized costs                     $     49,354,620      $    47,487,436    $  48,190,228
                                                           ================      ===============    =============
</TABLE>



                                      F-19
<PAGE>   46

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)


               COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES


<TABLE>
<CAPTION>
                                                                              December 31,
                                                           ------------------------------------------------
                                                              1997               1996                1995
                                                              ----               ----                ----
<S>                                                        <C>                <C>              <C>          
                 Property acquisition costs                $   845,647        $   972,653      $   1,056,162
                 Development costs, including
                     prepayments                             6,814,035          4,109,532          6,675,443
</TABLE>

         In 1997, development costs include the purchase of $1,065,000 of
         producing oil and gas properties.


           RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES

<TABLE>
<CAPTION>
                                                               December 31,
                                         ------------------------------------------------------
                                             1997                  1996                1995
                                             ----                  ----                ----

<S>                                      <C>                  <C>                  <C>         
Oil and gas sales                        $ 15,418,755         $ 14,078,491         $ 13,969,378
Production costs                           (2,427,124)          (2,192,349)          (2,032,706)
Depreciation, depletion and
    amortization                           (5,287,066)          (5,155,681)          (4,898,667)
Abandonment and write down of
    oil and gas properties                   (523,513)            (671,992)            (137,587)
                                         ------------         ------------         ------------
                                            7,181,052            6,058,469            6,900,418

Income tax expense                            135,000              360,000              272,000
                                         ------------         ------------         ------------

Results of operations for oil and
    gas producing activities
    (excluding corporate overhead
    and financing costs)                 $  7,046,052         $  5,698,469         $  6,628,418
                                         ============         ============         ============
</TABLE>


         Income tax expense was computed using statutory tax rates and reflects
         permanent differences that are reflected in the Company's consolidated
         income tax expense for the year.


                                      F-20
<PAGE>   47


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)


               ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES

<TABLE>
<CAPTION>
                                                  Oil                 Gas
                                                 (BBLS)              (MCF)
                                                 ------              -----

<S>                                             <C>               <C>        
Balance, January 1, 1995                         809,000          37,947,000
    Extensions, discoveries and other
      additions                                  120,000           5,891,000
    Production                                  (107,000)         (4,259,000)
    Revision of previous estimates                10,000             479,000
                                             -----------         -----------

Balance, December 31, 1995                       832,000          40,058,000
    Extensions, discoveries and other
      additions                                  119,000           3,665,000
    Production                                  (112,000)         (4,264,000)
    Revision of previous estimates                73,000           1,556,000
                                             -----------         -----------

Balance, December 31, 1996                       912,000          41,015,000
    Extensions, discoveries and other
      additions                                   78,000           4,093,000
    Production                                  (126,000)         (4,322,000)
    Revision of previous estimates               (42,000)           (129,000)
                                             -----------         -----------

Balance, December 31, 1997                       822,000          40,657,000
                                             ===========         ===========


PROVED DEVELOPED RESERVES:
    December 31, 1994                            809,000          37,947,000
    December 31, 1995                            832,000          40,058,000
    December 31, 1996                            912,000          41,015,000
    December 31, 1997                            822,000          40,657,000
</TABLE>


         The Company has not determined proved reserves associated with its
         proved undeveloped acreage. At December 31, 1997 and 1996, the Company
         had 2,200 and 2,800 net proved undeveloped acres, respectively. The
         carrying cost of the proved undeveloped acreage that is included in
         proved properties amounted to $1,840,542 and $1,794,477 at December 31,
         1997 and 1996, respectively.


                                      F-21
<PAGE>   48

                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)


                    STANDARDIZED MEASURE OF DISCOUNTED FUTURE
                                 NET CASH FLOWS

<TABLE>
<CAPTION>
                                                           December 31,
                                              ---------------------------------------
                                               1997            1996            1995
                                               ----            ----            ----
                                                      (Thousands of Dollars)
<S>                                          <C>             <C>             <C>     
Future cash inflows from sales of oil
    and gas                                  $124,466        $132,308        $111,753
Future production and development
    costs                                      48,085          49,255          42,417
Future income tax expense                       1,885           2,171           2,090
                                             --------        --------        --------

Future net cash flows                          74,496          80,882          67,246
Effect of discounting future net cash
    flows at 10% per annum                     28,402          30,375          25,441
                                             --------        --------        --------

Standardized measure of discounted
    future net cash flows                    $ 46,094        $ 50,507        $ 41,805
                                             ========        ========        ========
</TABLE>



                CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED
                              FUTURE NET CASH FLOWS

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                -----------------------------------------
                                                 1997             1996             1995
                                                 ----             ----             ----
                                                       (Thousands of Dollars)

<S>                                            <C>              <C>              <C>     
Balance, beginning of year                     $ 50,507         $ 41,805         $ 44,875
Extensions, discoveries and other
    additions                                     5,553            6,168            8,229
Development costs incurred                          270              308              351
Revision of previous estimates                     (424)           2,616              634
Sales of oil and gas, net of production
    costs                                       (12,992)         (11,886)         (11,937)
Net change in income taxes                          149              (20)             279
Net changes in prices and production
    costs                                        (2,291)           5,660           (5,241)
Accretion of discount                             5,051            4,181            4,488
Other                                               271            1,675              127
                                               --------         --------         --------

Balance, end of year                           $ 46,094         $ 50,507         $ 41,805
                                               ========         ========         ========
</TABLE>



                                      F-22
<PAGE>   49


                        EVERFLOW EASTERN PARTNERS, L. P.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 9.  SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
         (UNAUDITED) (CONTINUED)

         The estimated future cash flows are determined based on year-end prices
         for crude oil, current allowable prices (reduced for periods beyond the
         contract period to year-end market prices) applicable to expected
         natural gas production, estimated production of proved crude oil and
         natural gas reserves, estimated future production and development costs
         of reserves, based on current economic conditions, and the estimated
         future income tax expense, based on year-end statutory tax rates (with
         consideration of future tax rates already legislated) to be incurred on
         pretax net cash flows less the tax basis of the properties involved.
         Such cash flows are then discounted using a 10% rate.

         The methodology and assumptions used in calculating the standardized
         measure are those required by SFAS No. 69. It is not intended to be
         representative of the fair market value of the Company's proved
         reserves. The valuation of revenues and costs does not necessarily
         reflect the amounts to be received or expended by the Company. In
         addition to the valuations used, numerous other factors are considered
         in evaluating known and prospective oil and gas reserves.



                                      F-23

<PAGE>   50


                                    PART III
                                    --------


ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------------

                  The Company, as a limited partnership, does not have any
directors or executive officers. The General Partner of the Company is Everflow
Management Company, an Ohio general partnership formed in September 1990 to act
as the Company's General Partner. The general partners of Everflow Management
Company as of March 20, 1998 are Everflow Management Corporation, an Ohio
corporation ("EMC"), Thomas L. Korner, William A. Siskovic and David T. Matak,
all of whom are directors and/or officers of EEI, and Sykes Associates, a
limited partnership controlled by Robert F. Sykes, Chairman of the Board of EEI.

                  EMC is the Managing General Partner of Everflow Management
Company. EMC was formed in September 1990 to act as the Managing General Partner
of Everflow Management Company. EMC is owned by the other general partners of
Everflow Management Company and EMC currently has no employees, but as Managing
General Partner of Everflow Management Company, makes all management and
business decisions on behalf of Everflow Management Company and thus on behalf
of the Company.

                  EEI has continued its separate existence and provides general,
administrative, management and leasehold functions for the Company. Personnel
previously employed by EEI to conduct its operation, drilling and field
supervisory functions have become employed directly by the Company and discharge
the same functions on behalf of the Company. All of EEI's outstanding shares are
owned by the Company.

                  DIRECTORS AND OFFICERS OF EEI AND EMC. The executive officers 
and directors of EEI and EMC as of March 20, 1998 are as follows:

<TABLE>
<CAPTION>

                                                       Positions and                    Positions and
      Name                            Age             Offices With EEI                 Offices With EMC
-----------------                     ---          ----------------------           ----------------------
<S>                                   <C>          <C>                              <C>                        
Robert F. Sykes                       74           Chairman of the Board            Chairman of the Board
                                                                                    and Director

Thomas L. Korner                      44           President and Director           President and Director
David A. Kidder                       59           Treasurer                        None
David T. Matak                        39           Vice President/Land              Vice President and Director

William A. Siskovic                   42           Vice President, Secretary,       Vice President, Secretary-
                                                   Principal Financial and          Treasurer, Principal
                                                   Accounting Officer and           Financial and Accounting
                                                   Director                         Officer and Director
</TABLE>

                                      -26-
<PAGE>   51

All directors of EEI are elected to serve by the Company, which is EEI's sole
shareholder. All officers of EEI serve at the pleasure of the Board of
Directors. Directors and officers of EEI receive no compensation or fees for
their services to EEI or their services on behalf of the Company.

                  All directors and officers of EMC hold their positions with
EMC pursuant to a shareholders' agreement among EMC and such directors and
officers. The shareholders agreement controls the operation of EMC, provides for
changes in share ownership of EMC, and determines the identity of the directors
and officers of EMC as well as their replacement.

ROBERT F. SYKES has been a Director of EEI since March 1987 and Chairman of the
Board since May 1988. Mr. Sykes is the Chairman of the Board and a Director of
EMC and has served in such capacities since its formation in September 1990. He
was the Chairman of the Board of Sykes Datatronics, Inc., Rochester, New York,
from its organization in 1986 until his resignation in January 1989. Sykes
Datatronics, Inc. is a manufacturer of telephone switching equipment. Mr. Sykes
also served as President and Chief Executive Officer of Sykes Datatronics, Inc.
from 1968 until October 1983 and from January 1985 until October 1985. Mr. Sykes
also has been a Director of Voplex, Inc., Rochester, New York, a manufacturer of
plastic products, since 1980 and a Director of ACC Corp., a long distance
telephone company, since 1988.

THOMAS L. KORNER has been President of EEI and EMC since November 1995 and the
President and Treasurer of Everflow Nominee. Mr. Korner is also a Director of
EMC and has served in such capacity since its formation in September 1990. He
served as Vice President and Secretary of EEI from April 1985 to November 1995
and as Vice President and Secretary of EMC from September 1990 to November 1995.
He served as the Treasurer of EEI from June 1982 to June 1986. Mr. Korner
supervises and oversees all aspects of EEI's business, including oil and gas
property acquisition, development, operation and marketing. Prior to joining EEI
in June 1982, Mr. Korner was a practicing certified public accountant with Hill,
Barth and King, certified public accountants, and prior to that with Arthur
Andersen & Co., certified public accountants. He has a Business Administration
Degree from Mt. Union College.

DAVID A. KIDDER has been the Treasurer of EEI since June 1986 and has been
employed by EEI since April 1985. From 1983 to 1985, he was Treasurer of LGM
Corporation, Columbus, Ohio, an oil and gas service company; from 1982 to 1983,
he was Treasurer of OPEX, Inc., Columbus, Ohio, a producer of oil and gas; and
from 1980 to 1981, he was Treasurer of United Petroleum, Inc., Columbus, Ohio, a
producer of oil and gas. From 1973 to 1980, Mr. Kidder was involved in the oil
and gas industry in various financial and accounting capacities. Prior to that
time, Mr. Kidder practiced as a certified public accountant with Coopers &
Lybrand, certified public accountants. Mr. Kidder has a Bachelor of Arts Degree
in Accounting from the University of Cincinnati.

DAVID T. MATAK has been Vice President of EEI since July 1987. He is primarily
responsible for the exploration and development activities of EEI. Mr. Matak is
a Vice President and a Director of EMC and has served in such capacities since
its formation in September 1990. From September 1982 to June 1984, Mr. Matak
served as a teaching assistant in the Geology 

                                     -27-
<PAGE>   52

Department of the University of Akron and worked on the Clinton Research
Project at the university. From March 1984 to July 1986, Mr. Matak was a
geologist with Gasearch, Inc., Girard, Ohio, where he logged and evaluated over
200 wells and evaluated and reviewed all locations to be drilled by Gasearch,
Inc. Mr. Matak has a Bachelor of Science Degree in Biology and Geology from Mt.
Union College and a Masters Degree in Geology from the University of Akron.

WILLIAM A. SISKOVIC has been a Vice President of EEI since January 1989. Mr.
Siskovic is a Vice President, Secretary-Treasurer, Principal Financial and
Accounting Officer and a Director of EMC. He has served as Principal Financial
Officer and Secretary of EMC since November 1995 and in all other capacities
since the formation of EMC in September 1990. He is responsible for the
financial operations of the Company and EEI. From August 1980 to July 1984, Mr.
Siskovic served in various financial and accounting capacities including
Assistant Controller of Towner Petroleum Company, a public independent oil and
gas operator, producer and drilling fund sponsor company. From August 1984 to
September 1985, Mr. Siskovic was a Senior Consultant for Arthur Young & Company,
certified public accountants, where he was primarily responsible for the firm's
oil and gas consulting practice in the Cleveland, Ohio office. From October 1985
until joining EEI in April 1988, Mr. Siskovic served as Controller and Principal
Accounting Officer of Lomak Petroleum, Inc., a public independent oil and gas
operator and producer. He has a Business Administration Degree in Accounting
from Cleveland State University.

                  SECTION 16 DISCLOSURE. Section 16(a) of the Securities
Exchange Act of 1934 requires the Company's officers and directors, and persons
who own more than 10% of the Units to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% Unitholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

                  Based solely on review of the copies of such forms furnished
to the Company, the Company believes that for all of 1996, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.

ITEM 11.        EXECUTIVE COMPENSATION
--------------------------------------

                  As a limited partnership the Company has no executive officers
or directors, but is managed by Everflow Management Company, the General Partner
of the Company. The executive officers of EMC and EEI are compensated either
directly by the Company or indirectly through EEI. The compensation described
below represents all compensation from either the Company or EEI.




                                     -28-
<PAGE>   53


                  The following table sets forth information concerning the
annual and long-term compensation for services in all capacities to the Company
for the fiscal years ended December 31, 1997, 1996 and 1995, of those persons
who were, at December 31, 1997: (i) the chief executive officer; and (ii) the
other two most highly compensated executive officers of the Company. The Chief
Executive Officer and such other executive officers are hereinafter referred to
collectively as the "Named Executive Officers."
<TABLE>
<CAPTION>


                           SUMMARY COMPENSATION TABLE

                                                       Annual Compensation
                                                       -------------------
                                                                                    Other
                                                                                   Annual             All Other
          Name and                                                                 Compen-            Compen-
     Principal Position            Year              Salary           Bonus        Sation             Sation  (1)
     ------------------            ----              ------           -----        ---------         -----------   

<S>                                <C>               <C>             <C>             <C>              <C>      
Thomas L. Korner                   1997              80,000          43,375          1,818            35,965(2)
President                          1996              71,250          75,500          2,190            26,846(2)
                                   1995              45,000          33,000          3,236            30,653(2)

David T. Matak                     1997              80,000          43,375          1,102            37,941(3)
Vice President                     1996              73,000          95,500          1,241            28,530(3)
                                   1995              52,000          75,000          3,636            32,798(3)

William A. Siskovic                1997              80,000          43,375          1,497            26,609(4)
Vice President and                 1996              75,625          65,500          2,073            17,996(4)
Principal Financial and            1995              62,500          28,500          2,136            20,007(4)
Accounting Officer

<FN>

---------------

No Named Executive Officer received personal benefits or perquisites during
1997, 1996 and 1995 in excess of the lesser of $50,000 or 10% of his aggregate
salary and bonus.

(1)      Includes amounts received from participation in certain overriding
         royalty interest arrangements organized by EEI. Also includes amounts
         contributed under the Company's 401(K) Retirement Savings Plan. The
         Company matched an employee's contribution to the 401(K) Retirement
         Savings Plan to the extent of 50% of the first 6% of a participant's
         salary reduction. The amounts attributable to the Company's matching
         contribution vest immediately.

(2)      Includes amounts received by Thomas L. Korner from participation in
         certain overriding royalty interest arrangements organized by EEI of
         $32,264, $22,602 and $28,280 in 1997, 1996 and 1995, respectively.

(3)      Includes amounts received by David T. Matak from participation in
         certain overriding royalty interest arrangements organized by EEI of
         $34,240, $24,365 and $30,518 in 1997, 1996 and 1995, respectively.

(4)      Includes amounts received by William A. Siskovic from participation in
         certain overriding royalty interest arrangements organized by EEI of
         $22,908, $13,762 and $17,247 in 1997, 1996 and 1995, respectively.


</TABLE>



                                     -29-
<PAGE>   54


Everflow Management Company, EMC and the general partners do not receive any
separate compensation or reimbursement for their management efforts on behalf of
the Company. All direct and indirect costs incurred by the Company are borne by
Everflow Management Company as General Partner of the Company and the
Unitholders as Limited Partners of the Company in proportion to their respective
interest in the Company. The general partners are not entitled to any fees or
other compensation as a result of the acquisition or operation of oil and gas
properties by the Company. The general partners, in their individual capacities,
are not entitled to share in distributions from or income of the Company on an
ongoing basis, upon liquidation or otherwise. The general partners only share in
the revenues, income and distributions of the Company indirectly through their
ownership of Everflow Management Company, as the General Partner of the Company.
Everflow Management Company is entitled to share in the income and expense of
the Company on the basis of its interests as the General Partner of the Company.
Everflow Management Company contributed Interests (as defined and described in
"Item 1. Business" above) with an Exchange value of $670,980 for its interest as
a general partner in the Company.

                  None of the officers of EEI or EMC has an employment agreement
with either EEI or EMC.


ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------------

                  Everflow Management Company is a general partnership of which
EMC, an Ohio corporation is the Managing General Partner. The general partners
of Everflow Management Company are Thomas L. Korner, William A. Siskovic and
David T. Matak, all of whom are directors or officers of EEI, and Sykes
Associates, a limited partnership controlled by Robert F. Sykes, Chairman of the
Board of EEI and EMC. The general partners and their affiliates currently hold
(in addition to Everflow Management Company's interest as a general partner of
the Company) 1,388,010 Units, representing approximately 22% of the outstanding
Units.

                  Everflow Management Company, as General Partner of the
Company, owns a 1.07% general partner's interest in the Company.

                  The following table sets forth certain information with
respect to the number of Units beneficially owned as of March 20, 1998 by each
person known to the management of the Company to own beneficially more than 5%
of the outstanding Units; by each director and officer of the Company; and by
all directors and officers as a group. The table also sets forth (i) the
ownership interests of Everflow Management Company, and (ii) the ownership of
EMC.




                                     -30-
<PAGE>   55
<TABLE>
<CAPTION>


                  BENEFICIAL OWNERSHIP OF UNITS IN THE COMPANY,
                       EVERFLOW MANAGEMENT COMPANY AND EMC

                                                                                   Percentage
                                                                                   Interest in
                                                                Percentage          Everflow         Percentage
              Name                             Units             of Units          Management        Interest in
             of Holder                      in Company         in Company(1)       Company(2)           EMC
---------------------------------           ----------         -------------       ----------         --------
<S>                                          <C>                 <C>                  <C>              <C>    
Robert F. Sykes(3)                           1,062,854           17.12                57.1429          57.1429
Thomas L. Korner                               153,665            2.48                14.2857          14.2857
David T. Matak                                  99,771            1.61                14.2857          14.2857
William A. Siskovic                             71,720            1.16                14.2857          14.2857
All officers and directors as
   a group (4 persons in
   Everflow Management
   Company)                                  1,388,010           22.36               100.0000         100.0000

<FN>

----------------------
(1)  Does not include the interest in the Company owned indirectly by such
     individuals as a result of their ownership in (i) Everflow Management
     Company (based on Everflow Management Company's 1.07% general partner's
     interest in the Company) or (ii) EMC (based on EMC's 1% managing general
     partner's interest in Everflow Management Company).

(2)  Includes the interest in Everflow Management Company owned indirectly by
     such individuals as a result of their share ownership in EMC resulting from
     EMC's 1% managing general partner's interest in Everflow Management
     Company.

(3)  Includes 739,245 Units held by Sykes Associates, a New York limited
     partnership comprised of Mr. Sykes and his wife as general partners and
     four adult children as limited partners, 162,462 Units of the Company held
     by the Robert F. Sykes Annuity Trust and 161,147 Units held by the
     Catherine Sykes Annuity Trust.
</TABLE>


ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------

                  In the past, certain officers, directors and more than 10%
Unitholders of the Company have invested, and may in the future invest, in oil
and gas programs sponsored by EEI on the same terms as unrelated investors. In
the past, certain officers, directors and/or more than 10% Unitholders of the
Company have frequently participated and will likely participate in the future
as working interest owners in wells in which the Company has an interest. The
Company anticipates that any such participation by individual members of the
Company's management would enable such individuals to participate in the
drilling and development of undeveloped drillsites on an equal basis with the
Company or the particular drilling program acquiring such drillsites, which
participation would be on a uniform basis with respect to all drilling conducted
during a specified time frame, as opposed to selective participation.
Frequently, such participation has been on more favorable terms than the terms
which were available to unrelated investors. Frequently, EEI loaned its officers
the funds necessary to participate in the drilling and development of such
wells. The loans are secured by the interests in the oil and gas properties.
Such loans currently accrue interest at the rate of 1% over the prime rate per
annum. As of December 31, 1997, the aggregate outstanding balance of such
indebtedness was approximately $572,000, with Thomas L. Korner, David T. Matak
and William A. Siskovic owing $166,000, $224,000 and $182,000, respectively.



                                     -31-
<PAGE>   56


                  Certain officers and directors of EMC own oil and gas
properties and, as such, contract with the Company to provide field operations
on such properties. These ownership interests are charged per well fees for such
services on the same basis as all other working interest owners.


                                     PART IV
                                     -------


ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------------

(a)    (1)        FINANCIAL STATEMENTS

                  The following Consolidated Financial Statements of the
Registrant and its subsidiaries are included in Part II, Item 8:
<TABLE>
<CAPTION>

                                                                             Page(s)
                                                                             -------
<S>                                                                        <C>
Auditors' Report on Audited Financial Statements                               F-3
       Balance Sheets                                                       F-4 - F-5
       Statements of Income                                                    F-6
       Statements of Partners' Equity                                          F-7
       Statements of Cash Flows                                             F-8 - F-9
       Notes to Financial Statements                                       F-10 - F-23
</TABLE>

(a)    (2)        FINANCIAL STATEMENTS SCHEDULES

                  All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

(a)    (3)        EXHIBITS

                  See the Exhibit Index at page E-1 of this Annual Report on
                  Form 10-K.

(b)    On November 7, 1997, the Registrant filed a current report on Form 8-K
       relating to pricing adjustments under the Company's Agreements with The
       East Ohio Gas Company.



                                      -32-
<PAGE>   57

                                   SIGNATURES
                                   ----------

                  Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

EVERFLOW EASTERN PARTNERS, L.P.

By:      EVERFLOW MANAGEMENT COMPANY,
         General Partner
By:      EVERFLOW MANAGEMENT CORPORATION,
         Managing General Partner


<S>      <C>                                <C>                                        <C>
By:      /s/Robert F. Sykes                 Director                                   March  26 , 1998
         ---------------------------                                                         ----
         Robert F. Sykes



By:      /s/Thomas L. Korner                President and Director                     March  26 , 1998
         ---------------------------                                                         ----
         Thomas L. Korner



By:      /s/William A. Siskovic             Vice President,                            March  26 , 1998
         ---------------------------        Secretary-Treasurer                              ----
         William A. Siskovic                and Director (principal  
                                            financial and accounting 
                                            officer)                 
                                            



By:      /s/David T. Matak                  Vice President and                         March  26 , 1998
         ---------------------------        Director                                         ----
         David T. Matak                     

</TABLE>


<PAGE>   58
<TABLE>
<CAPTION>

                                  Exhibit Index
                                  -------------


    Exhibit No.                                 Description
    -----------                                 -----------

        <S>         <C>                                                                 <C>
        4.1         Certificate of Limited Partnership of the Registrant                (1)
                    dated September 13, 1990, as filed with the Delaware
                    Secretary of State on September 14, 1990

        4.2         Form of Agreement of Limited Partnership of the                     (1)
                    Registrant

        4.3         General Partnership Agreement of Everflow                           (1)
                    Management Company

        4.4         Articles of Incorporation of Everflow Management                    (1)
                    Corporation

        4.5         Code of Regulations of Everflow Management                          (1)
                    Corporation

        4.6         Shareholders Agreement for Everflow Management                      (1)
                    Corporation

        4.7         Third Amended and Restated Loan Agreement,                          (2)
                    dated as of May 1, 1991 between Everflow
                    Eastern, Inc., the Registrant and the banks listed
                    therein, with National Bank of Detroit as Agent

        4.8         First Amendment to Third Amended and Restated                       (5)
                    Loan and Security Agreements dated July 1, 1993,
                    between Everflow Eastern, Inc. and Everflow Eastern
                    Partners, L.P. and the banks listed therein, with
                    National Bank of Detroit as Agent

        4.9         Revolving Credit Note to First Amendment to Third                   (5)
                    Amended and Restated Loan and Security Agreement
                    dated as of July 1, 1993

        4.10        Credit Agreement dated January 19, 1995 between                     (8)
                    Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
                    and Bank One, Texas, National Association
</TABLE>


                                      E-1
<PAGE>   59
<TABLE>
<CAPTION>

                             Exhibit Index
                             -------------


    Exhibit No.                            Description
    -----------                            -----------
        <S>         <C>                                                                <C>
        4.11        Amendment to Credit Agreement dated February 23, 1996              (13)
                    between Everflow Eastern, Inc. and Everflow Eastern
                    Partners, L.P. and Bank One, Texas, National Association

        4.12        Second Amendment to Credit Agreement dated December 30,            (13)
                    1996 between Everflow Eastern, Inc. and Everflow Partners,
                    L.P. and Bank One, Texas, National Association

        4.13        Loan Modification Agreement dated June 16, 1997 between            (14)
                    Bank One, N.A., Bank One, Texas, N.A. and Everflow
                    Eastern, Inc. and Everflow Eastern Partners, L.P.

       10.1         Lease Agreement dated June 30, 1984 by and                          (1)
                    between Village Green Associates, Inc. and
                    Everflow Eastern, Inc.

       10.2         Gas Purchase Agreement dated September 3, 1991                      (3)
                    by and between the Registrant and The East Ohio
                    Gas Company

       10.3         Intermediate Term Adjustable Price Gas Purchase                     (4)
                    Agreement, contract #10342, dated October 9, 1992,
                    between The East Ohio Gas Company and Everflow
                    Eastern Partners, L.P.

       10.4         Quaker State Full Load Crude Oil Purchase Agreement                 (4)
                    Dated January 13, 1993, between Quaker State Oil
                    Refining corporation and Everflow Eastern Partners, L.P.

       10.5         Intermediate Term Adjustable Gas Purchase Agreement,                (6)
                    Contract #10461, dated March 10, 1994, between The
                    East Ohio Gas Company and Everflow Eastern Partners, L.P.

       10.6         Intermediate Term Adjustable Gas Purchase Agreement,                (7)
                    Contract #10515, dated August 10, 1994, between The
                    East Ohio Gas Company and Everflow Eastern Partners, L.P.

</TABLE>

                                      E-2
<PAGE>   60

<TABLE>
<CAPTION>

                             Exhibit Index
                             -------------


    Exhibit No.                            Description
    -----------                            -----------

       <S>          <C>                                                                              <C>
       10.7         Operating facility lease dated October 3, 1995 between                            (9)
                    Everflow Eastern Partners, L.P. and A-1 Storage of
                    Canfield, Ltd.

       10.8         Intermediate Term Adjustable Gas Purchase Agreement,                             (11)
                    Contract #11245, dated May 29, 1996, between The
                    East Ohio Gas Company and Everflow Eastern Partners, L.P.

       10.9         Intermediate Term Adjustable Gas Purchase Agreement,                             (11)
                    Contract #11285, dated May 29, 1996, between The
                    East Ohio Gas Company and Everflow Eastern Partners, L.P.

       10.10        One Year Term Gas Purchase Agreement dated August 1,                             (12)
                    1996, between Everflow Eastern Partners, L.P. and
                    JDS Energy Corporation

       10.11        One Year Term Gas Purchase Agreement dated January 20,                           (13)
                    1997, between Everflow Eastern Partners, L.P. and
                    JDS Energy Corporation

       22.1         Subsidiaries of the Registrant                                                   (10)

       27           Financial Data Schedule

</TABLE>

(1)      Incorporated herein by reference to the appropriate exhibit to
         Registrant's Registration Statement on Form S-1 (Reg. No. 33-36919).

(2)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1991.

(3)      Incorporated herein by reference to the appropriate exhibit to
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1991 (File No. 0-19279).

(4)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1992 (File No. 0-19279).

(5)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1993.

(6)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1994.

(7)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the third quarter ended
         September 30, 1994.

(8)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1994 (File No. 0-19279).

(9)      Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the third quarter ended
         September 30, 1995.



                                      E-3
<PAGE>   61

(10)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1995 (File No. 0-19279).

(11)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1996.

(12)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the third quarter ended
         September 30, 1996.

(13)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1996 (File No. 0-19279).

(14)     Incorporated herein by reference to the appropriate exhibit to the
         Registrant's Quarterly Report on Form 10-Q for the second quarter ended
         June 30, 1997.




                                      E-4